A cash flow-based approach for assessing expansion options stemming from project modularity

Investment projects in the electricity production industry face a dynamic and complex context. Project's modularity, through the breakdown of the project output into a set of small identical independent units, enables a stepwise investment policy and a partial self-financing of the project, so improving project's flexibility. As a consequence, the construction phase may be described as a sequence of expansion options, each option allowing for deciding if and when to build the next production unit. Firstly, this paper proposes a model of the project cash flow aiming at evaluating and comparing alternative configurations of a production plant, considering both the construction and operation phases. Secondly, an expanded net present value model, based on Monte Carlo simulation, has been developed in order to estimate the value for the project of the expansion options stemming from project's modularity. The model has been applied to a case concerning a III+ generation modular nuclear power plant.

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