Abstract
Indoor air quality (IAQ) can produce significant economic benefits for the tenant during the use of the building. However, currently the potential economic benefits on a tenant’s employees’ health and performance are not considered in feasibility studies for IAQ investments. Here, the economic value refers to benefits that can be expressed numerically in terms of money such as cost savings and increased revenues and that which impacts the building user organization’s financial profitability. This paper is one of the first known studies to explore real option analysis (ROA) as a potential approach to evaluate the life-cycle profitability of investments in IAQ. The research is carried out as a case study, which is a healthcare construction project in Finland. The main finding of this paper is that ROA seems to provide a viable method for the evaluation of investments in IAQ. In the case study, the economic benefits of IAQ to the tenant are noticeable. The real option value of the economic benefits of better IAQ is almost 4 million euros and the real option pay-off of the IAQ investment exceeds 0.5 million euros. The results are indicative only but imply that ROA is a promising method to evaluate investments in IAQ.
Highlights
Good indoor air quality (IAQ) is beneficial for human health and performance
Given the large uncertainties associated with the estimation of the economic benefits of IAQ, the traditional investment analysis approaches, in particular the discounted cash flow (DCF) that focuses on risk assessment instead of uncertainty, do not work very well in evaluating investments in IAQ and may lead to adverse selection
The aim of this study is to demonstrate real option analysis (ROA) for the evaluation of IAQ investments and develop a research process for evaluating IAQ investments in the early stages of a real life construction project
Summary
Good indoor air quality (IAQ) is beneficial for human health and performance. Potential benefits of an improved IAQ include lower healthcare costs, reduced sick leaves of occupants, better performance in work, lower turnover of employees, and lower cost of building maintenance due to fewer complaints about indoor air quality. Given the large uncertainties associated with the estimation of the economic benefits of IAQ, the traditional investment analysis approaches, in particular the discounted cash flow (DCF) that focuses on risk assessment instead of uncertainty, do not work very well in evaluating investments in IAQ and may lead to adverse selection. This exploratory article investigates real option analysis (ROA) as a potential new approach to evaluate the economic benefits and profitability of investments in IAQ under major uncertainties. The case study demonstrates how ROA can be used to quantify the economic benefits of IAQ and evaluate the investment pay-off under uncertainty in a real life construction project. The article ends with discussion and conclusions, and suggestions for future research
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