Monte Carlo analysis and its application within the valuation of technologies

Abstract

This work follows the paper entitled The Valuation and Financial Management of (Nano-) Technology in Relation to Sustainable Growth presented at the Third International Conference on Environmental Economics and Investment Assessment (Limassol, Cyprus, 2010), which demonstrated the practical usage of the general economic model on the valuation of a modern and original technology (nano-fibrous carrier) for wastewater treatment applying tailor-made microorganisms with the ability to create natural biofilm. The original general economic model for the valuation of wastewater treatment technologies is structured as follows: cost model wastewater treatment technology, depreciation model of wastewater treatment, cash flow model of wastewater treatment, sensitivity analysis. The authors extended this work on further calculations with the use of the Monte Carlo method, in order to analyze the characteristics of a project’s net present value (NPV), the cash flow components that are impacted by uncertainty. These characteristics are modelled, incorporating any correlation, mathematically reflecting their “random characteristics”. Then, these results are combined in a histogram of NPV (i.e. the project’s probability distribution), and the average NPV of the potential investment into the wastewater treatment technologies – as well as its volatility and other sensitivities – is observed. This distribution allows for an estimate of the probability that the project has a net