Civil Engineering Reference
In-Depth Information
intervals (Ye and Tiong
2000
; Dowd
1998
). However, there are several objections
to adjusting both the discount rate and the variables in the NPV method because
this amounts to double counting the risk (Myers
1976
). Finally, the NPV technique
does not allow the decision-maker to account for the indirect and strategic values
of an investment that might create future growth opportunities to the existing
building stakeholders either through follow-up NZER on other buildings in their
portfolio, or acquiring new buildings and sustainably NZER them (Menassa
2011
).
Therefore, an investment valuation method that overcomes the limitations of the
traditional NPV method will allow the decision-maker to effectively quantify
the economic value of any NZER and suggest optimal investment strategies when
the future is uncertain.
To achieve this objective, principles from modern option pricing theory in
finance can be used to augment the traditional NPV method and develop a
framework for single or multiphase investment evaluation of NZER (Menassa
2011
). This framework allows building stakeholders to account for different
scenarios when they encounter a NZER and properly manage the associated
uncertainties. Optimal investment strategies can be developed with this framework
that allow the stakeholders to postpone investment until the uncertainty is
resolved. Table
4
shows the different examples of strategies for NZER investment
evaluation.
The recommended strategies can help existing building stakeholders in evalu-
ating investment in NZER and develop optimal investment strategies. In the
single-stage investment, the building stakeholders can decide to postpone
the investment until uncertainty is resolved. This will result in a higher NPV for
the investment even when initially the traditional NPV is positive. For a multistage
investment, the staging with the option to abandon provides a better opportunity as
opposed to the case where the whole project is dependent on the completion of all
stages. Thus, the framework provides a good alternative to the traditional NPV
approach when uncertainty is high, and the building stakeholders want to incor-
porate more strategic investment opportunities in their analysis. Applying this
approach, however, requires significant data collection and availability of histor-
ical information related to similar NZER. In the subsequent section, option pricing
in financial market is presented as a basis to develop an improved framework for
single or multiphase investments in NZER and illustrate the benefits of this
evaluation approach over the traditional NPV approach for NZER and other
similar projects characterized by high and varying uncertainty levels.
6 Framework to Evaluate Refurbishment Investments
The suggested strategies in the previous section can help existing building stake-
holders in evaluating investments in NZER. This section presents a new approach
to project evaluation based on the option pricing theory. This is illustrated in the
context of a case study example.
