Application of real options to investment on power construction

The traditional net present value methods didn't do well in the evaluation of power construction projects, which are characterized by large scale of investment, long construction period, and many complex uncertainties, as it is difficult for those methods to calculate the relevant cash flow, internal rate of return and other key indicators. In this paper, we make use of real options to deal with uncertainty in power construction project investment analysis and decision-making, regard risk factors rationally and excavate its option value, thus reflecting the true value of the investment project. Moreover, the paper examined the option value of a power plant with the B-S model. The result reflects that, compared to NPV method, more value would be excavated when considering its flexibility value due to the uncertainty.