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R&D investment decision on smart cities: Energy sustainability and opportunity

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  • Biancardi, Marta
  • Di Bari, Antonio
  • Villani, Giovanni

Abstract

Public administrations frequently tend to make communities as much sustainable as possible pursuing smart city goals. Solar energy investments represent a valid opportunity to support smart cities and consequently the sustainable economic development. The valuation of these projects is not a simple task considering their sequential nature and riskiness. This article proposes a compound Real Options Approach (ROA) as a tool for potential investors to make a conscious R&D renewable investment decision on smart cities. In this sense, we fit the compound ROA with the framework of a typical smart city project in solar energy field. We also provide a case study to make a comparison between classical Expected Net Present Value (ENPV) approach and compound ROA. The results show that ENPV underestimates the project value, whereas compound ROA allows to obtain a more attractive valuation of the project by embedding in the analysis the managerial flexibility value.

Suggested Citation

  • Biancardi, Marta & Di Bari, Antonio & Villani, Giovanni, 2021. "R&D investment decision on smart cities: Energy sustainability and opportunity," Chaos, Solitons & Fractals, Elsevier, vol. 153(P2).
    • Handle: RePEc:eee:chsofr:v:153:y:2021:i:p2:s0960077921009085
    DOI: 10.1016/j.chaos.2021.111554
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    References listed on IDEAS

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    More about this item

    Keywords

    Smart city project; Expected Net Present Value; Compound Real Option Approach; Solar energy project;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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