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

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.