EPC renewable project evaluation: a fuzzy real option pricing model

ABSTRACT

Engineer–procure–construct (EPC) projects in the renewable energy field have attracted considerable attention and have become a hot spot of investment because of their management advantages and supportive policies. However, the investment value of EPC projects is difficult to evaluate when considering the uncertainty factors and non-preciseness of input data, which are often neglected by traditional valuation methodology. Therefore, a fuzzy real option pricing model, which can do away with the vagueness of project data, could be a useful approach in evaluating the investment value of EPC projects. Based on the Black–Scholes formula and fuzzy theory, the authors propose a fuzzy real option pricing model that introduces a fuzzy number (T-number) to describe uncertainty factors, and the optimal investment decision criterion is also described to calculate the optimal investment timing. Lastly, a data set of a real EPC project as an illustrative example of valuation is presented, and the results based on the proposed model are satisfactory.

KEYWORDS:

• Engineer–procure–construct (EPC) project
• fuzzy number
• real option
• valuation
• investment timing

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71572063, 71772074];Fundamental Research Funds for the Central Universities [HUST: 2013WZ012, and HUST: 2015QN180].