Fuzzy real option valuation in a power station reengineering project

A new tool for valuing real options, Fuzzy Real Option Value (FROV), was defined by Carlsson and Fuller introducing fuzzy numbers into the Black-Scholes formula as a method to better deal with imprecise information and unccrfainty involved in Large-scale investment projects. This paper presents an application of thc FROV model in a real investment project from the energy sector. The Naantali Power Plant, Finland, is considering a portfolio of investment alternatives for the re-engineering of its combined heat and power coal units. Cash flows are assessed by means of a mixed integer-programming problem and after their conversion to fuzzy numbers, the Fuzzy NPV and FROV are calculated and the optimal investment timing proposed using a decision process tree developed by the Wacno Team. Also, a sensitivity analysis on the parameters of the fuzzy B-S formula is carried out and the results analyzed.