Dynamic Capital Investment

This course deals with dynamic capital investment decisions under uncertainty. The main topic is real option theory, while examples and applications will emphasise on energy economics. By considering discretion over investment timing and managerial flexibility (in terms of technology choice, capacity size, and operations), the real options approach provides an enhanced analytical framework within which to make decisions given uncertainty in one or more underlying variables. Due to such features, it is an enhancement to the traditional now-or-never net present value (NPV) approach, which is unable to account for not only discretion over timing but also sequential decision-making.

Since many investment and operational problems in the energy sector are rather sensitive to uncertainty (e.g., in fuel prices and investment costs), technology choice, and sequencing of projects, they are readily amenable to analysis by the real options approach, which would allow for assessment of strategies that would not have been able to be addressed adequately otherwise. Thus, in this course, we will provide a thorough grounding in the theory of real options, which will also encompass topics from recent research papers, before proceeding to illustrate how it may be applied to relevant problems in the energy sector.

- The course will provide in-depth knowledge within real options analysis, i.e. analysis of investment under uncertainty.

- The course will develop a basis for decision support regarding valuation and strategic decisions in larger investment projects, where uncertainty is an important factor.

- The course will provide knowledge about quantitative models for real options.

- Candidates following the course should capable to reflect and position their own research within the field of innovation research.

The course is scheduled as five intensive seminars taking place during one week, as a combination of lectures, seminars and student presentations.