Pub Date : 2020-12-28DOI: 10.1080/0013791X.2020.1867273
Kyong-Hui Kim, Chan S. Park
Abstract The main purpose of this paper is to expand real option analysis out of the realm of pure financial option pricing techniques. To overcome many of the well-known concerns by adopting the financial option pricing techniques for modeling real options problems such as replicating portfolio concept, geometric Brownian motion as underlying stochastic process, and estimating project volatility, we propose an alternative real option valuation based on the loss function approach. The option value determined by the loss function approach is equivalent to the expected value of perfect information (EVPI) in decision analysis. It basically sets the upper bound of risk premium to pay in retaining the options. In practice, many firms utilize the concept of Value at Risk to manage their portfolio risk. If a firm sets a target VAR, then we may be able to link this VAR in refining the actual risk premium to pay in hedging the risk embedded in the investment. With this practice in mind, we present a logic to figure out an appropriate amount of real option premium to pay for a given level of risk tolerance. A comprehensive example is presented to demonstrate the computational procedures as well as economic interpretations on the outcomes.
{"title":"Pricing real options based on linear loss functions and conditional value at risk","authors":"Kyong-Hui Kim, Chan S. Park","doi":"10.1080/0013791X.2020.1867273","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1867273","url":null,"abstract":"Abstract The main purpose of this paper is to expand real option analysis out of the realm of pure financial option pricing techniques. To overcome many of the well-known concerns by adopting the financial option pricing techniques for modeling real options problems such as replicating portfolio concept, geometric Brownian motion as underlying stochastic process, and estimating project volatility, we propose an alternative real option valuation based on the loss function approach. The option value determined by the loss function approach is equivalent to the expected value of perfect information (EVPI) in decision analysis. It basically sets the upper bound of risk premium to pay in retaining the options. In practice, many firms utilize the concept of Value at Risk to manage their portfolio risk. If a firm sets a target VAR, then we may be able to link this VAR in refining the actual risk premium to pay in hedging the risk embedded in the investment. With this practice in mind, we present a logic to figure out an appropriate amount of real option premium to pay for a given level of risk tolerance. A comprehensive example is presented to demonstrate the computational procedures as well as economic interpretations on the outcomes.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"3 - 26"},"PeriodicalIF":1.2,"publicationDate":"2020-12-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1867273","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47394052","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-12-10DOI: 10.1080/0013791X.2020.1853863
Amir Rajabian, Mageed Ghaleb, S. Taghipour
Abstract This paper presents a model for parallel replacement and improvement for a fleet of assets to minimize both the economic costs and greenhouse gas (GHG) emissions where the emissions are limited by an emissions trading system also known as cap-and-trade. The firm which owns the assets has the options of using, storing, improving, or salvaging them. Different technological types and their performances have been considered for the assets. The firm has the option of purchasing new assets from varying technologies and/or improving its existing assets to a higher-performance type. The model considers the possibility of both banking the emission allowances or trading them in the market. The model was applied to data from a fleet of excavators in Ontario, Canada. The model and the findings of this case study could help emitter firms to simultaneously manage the emissions and costs of their assets in a jurisdiction regulated by cap-and-trade.
{"title":"Optimal Replacement, Retrofit, and Management of a Fleet of Assets under Regulations of an Emissions Trading System","authors":"Amir Rajabian, Mageed Ghaleb, S. Taghipour","doi":"10.1080/0013791X.2020.1853863","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1853863","url":null,"abstract":"Abstract This paper presents a model for parallel replacement and improvement for a fleet of assets to minimize both the economic costs and greenhouse gas (GHG) emissions where the emissions are limited by an emissions trading system also known as cap-and-trade. The firm which owns the assets has the options of using, storing, improving, or salvaging them. Different technological types and their performances have been considered for the assets. The firm has the option of purchasing new assets from varying technologies and/or improving its existing assets to a higher-performance type. The model considers the possibility of both banking the emission allowances or trading them in the market. The model was applied to data from a fleet of excavators in Ontario, Canada. The model and the findings of this case study could help emitter firms to simultaneously manage the emissions and costs of their assets in a jurisdiction regulated by cap-and-trade.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"225 - 244"},"PeriodicalIF":1.2,"publicationDate":"2020-12-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1853863","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43371981","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-11-24DOI: 10.1080/0013791X.2020.1853862
Xi Luo, Yanfeng Liu, Xiaojun Liu
Abstract The design and operation of hybrid energy systems, which are relevant to remote islands characterized by energy and water supply shortage, have been extensively investigated. However, determining the costs of different system outputs is still a challenging task. In this study, a multi-objective optimization was performed to obtain the optimal design parameters of a hybrid energy system integrated with desalination. As each consumer demand (inclusive of electrical, cooling, and water demands) is highly coupled to the other, output pricing was performed based on cost allocation using the cooperative game theory. The results show that cooling, electricity, and desalinized water can be co-generated efficiently and economically, and the electrical, cooling, and water demands should bear 13.40%, 53.90%, and 32.70%, respectively, of the annualized costs of the entire hybrid energy system. In the proposed model, the cooling demand has the strongest coupling characteristic, whereas the electrical demand has the weakest, because the electricity waste from the photovoltaic/thermal panels allows easier integration of the cooling demands with other demands, for the consumption of excess solar power.
{"title":"Multi-objective optimization and cost-based output pricing of a standalone hybrid energy system integrated with desalination","authors":"Xi Luo, Yanfeng Liu, Xiaojun Liu","doi":"10.1080/0013791X.2020.1853862","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1853862","url":null,"abstract":"Abstract The design and operation of hybrid energy systems, which are relevant to remote islands characterized by energy and water supply shortage, have been extensively investigated. However, determining the costs of different system outputs is still a challenging task. In this study, a multi-objective optimization was performed to obtain the optimal design parameters of a hybrid energy system integrated with desalination. As each consumer demand (inclusive of electrical, cooling, and water demands) is highly coupled to the other, output pricing was performed based on cost allocation using the cooperative game theory. The results show that cooling, electricity, and desalinized water can be co-generated efficiently and economically, and the electrical, cooling, and water demands should bear 13.40%, 53.90%, and 32.70%, respectively, of the annualized costs of the entire hybrid energy system. In the proposed model, the cooling demand has the strongest coupling characteristic, whereas the electrical demand has the weakest, because the electricity waste from the photovoltaic/thermal panels allows easier integration of the cooling demands with other demands, for the consumption of excess solar power.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"51 - 70"},"PeriodicalIF":1.2,"publicationDate":"2020-11-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1853862","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46471209","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-10-14DOI: 10.1080/0013791X.2020.1829222
K. Kim, A. Deshmukh
Abstract Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. We investigate the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. We show that investors are on the investment bandwagon when (1) they expand their current capacities and (2) the second mover’s additional profit rate exceeds a threshold value. Otherwise, investors invest sequentially. This result explains the frequently observed investment herd effect.
{"title":"Bandwagon Investment Equilibrium of Investment Timing Games","authors":"K. Kim, A. Deshmukh","doi":"10.1080/0013791X.2020.1829222","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1829222","url":null,"abstract":"Abstract Empirical research reports various behaviors exhibited by investors, including voluntary concurrent investments, which are called bandwagon investments. However, the current theoretical understanding is still limited in explaining under which condition the investment bandwagon effect occurs. We investigate the closed-loop subgame perfect equilibrium of an investment timing game that describes voluntary simultaneous investments. We show that investors are on the investment bandwagon when (1) they expand their current capacities and (2) the second mover’s additional profit rate exceeds a threshold value. Otherwise, investors invest sequentially. This result explains the frequently observed investment herd effect.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"265 - 278"},"PeriodicalIF":1.2,"publicationDate":"2020-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1829222","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43044869","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-10-12DOI: 10.1080/0013791X.2020.1831119
Jing-Jong Jang, Moonkyu Seo, Gi-Yu Nam, Deok-Joo Lee
Abstract The economic feasibility of the investment is critical for residential users’ decision making in investing in photovoltaic (PV) systems because the high costs of installing PV technology may be burdensome. Therefore, governments in many countries have been implementing policies to reduce the economic burden of household users' PV investments and thus promote solar energy to household users. The purpose of this paper is to perform an economic feasibility analysis of investments in residential PV systems that considers the effects of several subsidy plan alternatives using the empirical data of Korea. The result shows that the residential PV investment project would be economically viable without subsidy; however, a payback period exceeds 8 years, which could be perceived by residential customers as too long to be attractive enough to invest in a PV system at present. In addition, we found that the net present value is highest under the production based subsidy scheme, whereas the payback period is shortest with a lump-sum subsidy.
{"title":"Economic feasibility of the investment in residential photovoltaics system considering the effects of subsidy policies: A Korean case","authors":"Jing-Jong Jang, Moonkyu Seo, Gi-Yu Nam, Deok-Joo Lee","doi":"10.1080/0013791X.2020.1831119","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1831119","url":null,"abstract":"Abstract The economic feasibility of the investment is critical for residential users’ decision making in investing in photovoltaic (PV) systems because the high costs of installing PV technology may be burdensome. Therefore, governments in many countries have been implementing policies to reduce the economic burden of household users' PV investments and thus promote solar energy to household users. The purpose of this paper is to perform an economic feasibility analysis of investments in residential PV systems that considers the effects of several subsidy plan alternatives using the empirical data of Korea. The result shows that the residential PV investment project would be economically viable without subsidy; however, a payback period exceeds 8 years, which could be perceived by residential customers as too long to be attractive enough to invest in a PV system at present. In addition, we found that the net present value is highest under the production based subsidy scheme, whereas the payback period is shortest with a lump-sum subsidy.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"206 - 224"},"PeriodicalIF":1.2,"publicationDate":"2020-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1831119","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45948191","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-10-01DOI: 10.1080/0013791X.2020.1852662
S. Ryan
{"title":"Letter from the editor","authors":"S. Ryan","doi":"10.1080/0013791X.2020.1852662","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1852662","url":null,"abstract":"","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"265 - 265"},"PeriodicalIF":1.2,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1852662","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48152774","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-10-01DOI: 10.1080/0013791X.2020.1837532
{"title":"Call for Nominations for the Institute of Industrial and Systems Engineers Wellington Award","authors":"","doi":"10.1080/0013791X.2020.1837532","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1837532","url":null,"abstract":"","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"381 - 381"},"PeriodicalIF":1.2,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1837532","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41557888","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-09-09DOI: 10.1080/0013791X.2020.1815918
Anastasia Blaset Kastro, N. Kulakov
Abstract An appropriate risk adjustment technique applied to discount rate for evaluating stochastic negative cash flows is discussed. The proposed approach considers a future cash flow as a response to an investment or a borrowing rather than an independent cash flow. As discount rates applied to evaluate investments and borrowings have different meanings, the generalized net present value method is more appropriate to value cash flows with opposite signs. The given method uses two different rates: the finance rate is applied to discount positive present values (PVs) and the reinvestment rate – to discount negative PVs of a nonconventional project. It is shown that these rates are adjusted for risk relatively to their risk-free values in an opposite way. A universal relationship between risk penalty and risk premium is derived from the assumption that investment and borrowing risks are equal in their value.
{"title":"Risk-adjusted discount rates and the present value of risky nonconventional projects","authors":"Anastasia Blaset Kastro, N. Kulakov","doi":"10.1080/0013791X.2020.1815918","DOIUrl":"https://doi.org/10.1080/0013791X.2020.1815918","url":null,"abstract":"Abstract An appropriate risk adjustment technique applied to discount rate for evaluating stochastic negative cash flows is discussed. The proposed approach considers a future cash flow as a response to an investment or a borrowing rather than an independent cash flow. As discount rates applied to evaluate investments and borrowings have different meanings, the generalized net present value method is more appropriate to value cash flows with opposite signs. The given method uses two different rates: the finance rate is applied to discount positive present values (PVs) and the reinvestment rate – to discount negative PVs of a nonconventional project. It is shown that these rates are adjusted for risk relatively to their risk-free values in an opposite way. A universal relationship between risk penalty and risk premium is derived from the assumption that investment and borrowing risks are equal in their value.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"66 1","pages":"71 - 88"},"PeriodicalIF":1.2,"publicationDate":"2020-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791X.2020.1815918","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45758573","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-07-02DOI: 10.1080/0013791x.2020.1784512
Joseph H. Wilck
{"title":"Introduction to the special issue on engineering economy education","authors":"Joseph H. Wilck","doi":"10.1080/0013791x.2020.1784512","DOIUrl":"https://doi.org/10.1080/0013791x.2020.1784512","url":null,"abstract":"","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"177 - 178"},"PeriodicalIF":1.2,"publicationDate":"2020-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2020.1784512","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46867157","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2020-07-02DOI: 10.1080/0013791x.2020.1781309
James Burns, B. White, Anna Konstant
Abstract Engineering economy has been studied by the majority of engineering students for many years, yet its place in engineering education is often misunderstood. Logic suggests that the engineering economy course would be highly valued since it is the only course many engineering students will take related to financial matters, but instead there is evidence that the subject is being marginalized. While pressures to reduce program credit hours and changes to the Fundamentals of Engineering exam may play a role in this, perhaps engineering economy has not sufficiently evolved to meet the needs of students or the realities of the contemporary workplace. What can be done to ensure that engineering economy fulfills its potential as an important part of engineering education? There may be few clear-cut answers, but we believe that engineering economy should shift toward a future characterized by rigorous coursework grounded in engineering design principles and applications of risk and uncertainty. This has been our goal in teaching engineering economy at Western Michigan University for many years. The purpose of this paper is to communicate the essential elements of a strategy that has helped to make the course a vibrant component of several engineering programs.
{"title":"Engineering economy as a vibrant and relevant course in the engineering programs of today and tomorrow","authors":"James Burns, B. White, Anna Konstant","doi":"10.1080/0013791x.2020.1781309","DOIUrl":"https://doi.org/10.1080/0013791x.2020.1781309","url":null,"abstract":"Abstract Engineering economy has been studied by the majority of engineering students for many years, yet its place in engineering education is often misunderstood. Logic suggests that the engineering economy course would be highly valued since it is the only course many engineering students will take related to financial matters, but instead there is evidence that the subject is being marginalized. While pressures to reduce program credit hours and changes to the Fundamentals of Engineering exam may play a role in this, perhaps engineering economy has not sufficiently evolved to meet the needs of students or the realities of the contemporary workplace. What can be done to ensure that engineering economy fulfills its potential as an important part of engineering education? There may be few clear-cut answers, but we believe that engineering economy should shift toward a future characterized by rigorous coursework grounded in engineering design principles and applications of risk and uncertainty. This has been our goal in teaching engineering economy at Western Michigan University for many years. The purpose of this paper is to communicate the essential elements of a strategy that has helped to make the course a vibrant component of several engineering programs.","PeriodicalId":49210,"journal":{"name":"Engineering Economist","volume":"65 1","pages":"236 - 258"},"PeriodicalIF":1.2,"publicationDate":"2020-07-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/0013791x.2020.1781309","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42594461","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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