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Project Evaluation: A Pracitcal Asset Pricing Method

Author

Listed:
  • Henry D. Jacoby
  • David G. Laughton

Abstract

This paper presents a practical approach to project evaluation using techniques of modern financial economics, with a sample application to oil development under a complex tax system. The method overcomes shortcomings of conventional discounted cash flow (DCF) methods which are either imprecise about the relation between economic value and uncertainty, or are rigid and unrealistic in the required assumptions about how a project's risks (and therefore its value) are influenced by market conditions, the project physical structure, and tax and contract provisions. It is based on the formulation and estimation of an "information model" which represents the resolution over time of uncertainties underlying a project (oil prices in the examples shown). The project can then be valued using derivative asset valuation, which replicates the consequences of a complex asset by a traded portfolio of simpler assets (in our case, riskless bonds and future claims on oil).

Suggested Citation

  • Henry D. Jacoby & David G. Laughton, 1992. "Project Evaluation: A Pracitcal Asset Pricing Method," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 19-48.
    • Handle: RePEc:aen:journl:1992v13-02-a02
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    Cited by:

    1. Plourde, A. & Watkins, G.C., 1993. "Crude Oil Prices: How Volatile in relation to Other Commodities?," Working Papers 9304e, University of Ottawa, Department of Economics.
    2. Lund, Diderik, 2009. "Marginal versus Average Beta of Equity under Corporate Taxation," Memorandum 12/2009, Oslo University, Department of Economics.
    3. Selim, Tarek, 2000. "A Value-Added Social Welfare Optimization Problem For Micro-Sustainable Development," MPRA Paper 120581, University Library of Munich, Germany.
    4. Berg, Magnus & Bøhren, Øyvind & Vassnes, Erik, 2018. "Modeling the response to exogenous shocks: The capital uplift rate in petroleum taxation," Energy Economics, Elsevier, vol. 69(C), pages 442-455.
    5. Emhjellen, Magne & Alaouze, Chris M., 2003. "A comparison of discounted cashflow and modern asset pricing methods--project selection and policy implications," Energy Policy, Elsevier, vol. 31(12), pages 1213-1220, September.

    More about this item

    JEL classification:

    • F0 - International Economics - - General

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