%0 Journal Article
%T Real Option Analysis of a Large-scale Space Solar Power Venture
%A Yael Gilboa
%A Xiaoyu Guo
%J Michigan Journal of Business
%D 2011
%I University of Michigan
%X This study values a large-scale Space Solar Power (SSP) venture by using Real Option Analysis (ROA), an advanced financial technique that takes managerial flexibility into account. We develop a model to represent the entire project as a series of decisions in a binomial tree. We calibrate the tree using data from energy markets as well as Monte Carlo simulations of the distribution of project value under expected conditions. In the end, specific sources of flexibility are formulated as Real Options within the binomial tree and the calculated value of these options is added to the Net Present Value (NPV) of the project. Unlike previous studies that argue SSP is economically unfeasible, we conclude that large-scale SSP is a viable business venture as long as the project is implemented in stages and real options are exercised optimally. Previous studies on the economic feasibility of SSP have used only static Discounted Cash Flow (DCF) models, which assume that a project will be carried out until completion under any circumstances. Our study, on the other hand, incorporates the flexibility to enter or abandon the project in response to energy prices, launch costs, and other technological parameters that affect the viability of the project. Modern decision analysis tools demonstrate that such flexibility adds tremendous value to a venture facing large uncertainties, as is the case with SSP.
%U http://michiganjb.org/issues/42/text42d.pdf