Present Value Approach Research Articles

The modified binomial options pricing model and the revised replicating portfolio approach with the concept of sustainability options

This paper discusses whether the project investment can develop the decision-making for the concept of sustainability options. The conventional net present value (NPV) approach assesses whether the project investment should be implemented, and develops the evaluation criteria of implementing sustainability costs from the modified binomial options pricing model (BOPM) and the revised replicating portfolio approach. It treats options premium value and the replicating portfolio approach (RPA) value as the objective functions, and the options premium of the BOPM and the initial values of the RPA as the decision variables.

Towards circular economy: Economic feasibility of waste to biomethane injection through proposed feed-in tariff

Lately International Energy Agency (IEA) highlighted the vital role the biogas and anaerobic digester (AD) in the advent of circular economy. Organic residues or waste will be converted into high-value products, power, heating and fuel in the future of bio-economy. This study look specifically into the institutional and market factor, of a Feed-in Tariff (FiT) mechanism as a policy instrument to promote integration of biomethane into existing gas grid. In the circumstance where market is not in the favour of bioenergy/biogas, with fossil fuels are subsidised under national economic policy of the case study in Malaysia; this study found that under the current piped natural gas price, the proposed FiT, 34.02–141.79 MYR/GJ (7.13–29.73 EUR/GJ) is economically incompetent for biomethane to be injected into the grid without other policy and mandate support. However, natural gas price rationalisation may close the price gap, this is especially for biomethane derived from palm oil mill effluent (POME) and food waste at 4 MW size. Through Net Present Value (NPV) approach, among the four locally available feedstock assessed in this study: POME, food waste, chicken manures and cattle manures; POME and food waste show lower levelised cost due to minimal competing utilisation value in addition to their higher biogas conversion rate. POME prevails as a feedstock choice for its uniform composition and on-site production advantage. Discussion and recommendations based on the current policy scenarios in Malaysia are provided in the section following results and findings.

San Francisco: rental restrictions and pre-restriction host listing motivation

PurposeSan Francisco started regulating short-term vacation rentals on rooms/apartments/houses located within city limits in September 2019. The objectives of this conceptual-scenario and regression study are to calculate the present value of the net earnings for a short-term residential rental property located in San Francisco pre-regulation and post-regulation, and consider a financial reason motivating households to list properties as short-term rentals.Design/methodology/approachA present value approach is used to estimate the value of rental space to tourists prior to the passage of San Francisco's short-term rental regulations compared to post-rental rules. Table 2 shows pre- and post-income scenarios. Price increases of +20, +40 and +60 percent over the initial base rate failed to restore host earnings to pre-registration levels. The present value model calculates the net revenue less net cost associated with listing a property. The regression model uses the number of listings as the dependent variable, and housing prices divided by weekly wages as independent variables.FindingsThe short-term rental regulations significantly reduce the profitability associated with short-term tourist stays offered by hosts and listed by online platforms. A host earns pre-regulation income when average daily rents increase by approximately 71.5 percent. It will likely limit income earned by hosts and Airbnb and other shared housing website platforms due to the reduced number of rental days allowed for shared housing caused by ordinances and host enrollment restrictions. The regression model results suggest that homeowners were listing properties for rent to help cover higher priced property purchases.Research limitations/implicationsAirbnb, VRBO, Booking.com, and HomeAway are all private companies; this means that financial information is not publicly available. HomeAway, VRBO, and Booking.com are companies owned by Expedia. FlipKey is owned by TripAdvisor. Due to limited public information regarding income statements and property listing trends, regression analysis and descriptive statistics cannot be generated using audited financial statements.Practical implicationsRent control restriction frequently sets the maximum price below the market-clearing price, which results in limited supply but increase in demand for housing. The San Francisco regulations outlaw second-home rentals and seriously limit the availability of other rentals to tourists. FlipKey and HomeAway tend to rent second homes, which San Francisco now bars from being rented for short-term.Social implicationsThe San Francisco restrictions were enacted with the goal of increasing the supply of rental housing available to permanent residents by restricting short-term rentals. This may have limited short-term benefits to permanent residents, but in the long term lowers income associated with single-family housing which will encourage housing arrangements that would avoid leasing restrictions and lower the number of new houses built. Other cities also have a history of rent controls, and are experiencing housing shortages and at the same time attracting large numbers of tourists. These cities may be motivated to enact similar rental restrictions as those approved in San Francisco.Originality/valueThese short-term rental restrictions just started being implemented and enforced. A court decision upheld them. There were media reports outlining the restrictions, but enforcement has just started, so no research papers have been written about San Francisco. Prior research studies have not used net present value analysis to calculate the loss to the host by enacted ordinances restricting tourists’ length of stay and have neither tried to explain why homeowners are listing properties for short-term rentals.

Stochastic-dynamic modelling of farm-level investments under uncertainty

In the light of uncertainties, high initial costs, and temporal managerial flexibility, the real options approach has gained interest as a valuation tool for different types of natural resources management problems. Yet, neither real options valuation method excels under consideration of variability of resource endowments, returns-to-scale and predefined sizes of options. We fill the methodological gap by developing a method based on Monte Carlo simulation, scenario tree reduction, and stochastic programming that is advantageous for valuing real options where timing, scale and interactions among constraints and alternatives matter. The method advances in straightforward conversion of deterministic programming applications based on the classical net present value approach into a real options framework, and in introducing complexity into existing real options models. We illustrate the method with a case study featuring investment options regarding the adoption, coppicing, and conversion of perennial biomass energy production systems.

The Economic Benefits of Malaysian University Degrees

AbstractThis study analyzes the net returns of educational investment in Malaysia using the net present value approach. The estimations consider the tuition payments of nine different bachelor degree programs of public and private universities in Malaysia and the forgone earnings while undertaking the degree programs as the cost of investments in human capital. The returns to education investment are based on the expected income accrued by the individual over the employment period until retirement. Under the assumptions that an individual would work until the retirement age of 60 years and a discount rate of 4 percent, the estimations show that holding a computer science degree from Universiti Sains Malaysia would give the highest net present value. Holding a medical degree, in general, would give the lowest net returns on educational investment as compared to the other selected programs. The net returns are sensitive to the costs of education, earnings and the duration of undertaking the degree programs.Keywords: Human capital investment, net present value, private rate of return, educational investment, Malaysian degree programmes

Economic Feasibility of Semi-Underground Pumped Storage Hydro Power Plants in Open Pit Mines

This work aims at the economic evaluation of a semi-underground pumped hydro storage power plant erected in an abandoned open pit mine. For the exploratory model-based analysis, we develop and apply both a simple deterministic and a stochastic net present value (NPV) approach, the latter of which uses Monte Carlo simulation to account for revenue uncertainty from electricity price fluctuations. The analytical framework developed is applied to two promising sites in the Rheinland region in Germany, Hambach and Inden, making reasonable parameter value assumptions and considering and ignoring the lengthy duration of lower reservoir flooding. The investor's value-at-risk is computed for alternative performance indicators (the NPV, net cash recovery, profit-to-investment ratio, and specific production costs) to compare the different outcomes in terms of the project's financial risk distribution. Calculations show that a semi-underground pumped hydro storage power plant in an abandoned open pit mine can be constructed at reasonably low investment costs and operated at low specific production costs. However, because the investment has to be made long before the pit lake is (naturally) flooded - a process that for realistic flow rates may take up to 20 years - the project is highly uneconomical and would require substantial subsidies, as compared to a situation where flooding happens immediately.

Valuation of renewable energy investments: an explanatory mixed-methods study about applied approaches amongst practitioners

The purpose of this explanatory, sequential, mixed-methods study is to learn about the applied valuation processes for renewable energy investments to explore key value drivers, best practice approaches and improvements amongst Swiss and German investment professionals. The results demonstrate that both systematic and unsystematic risks are relevant. Risk preferences and subsequently valuation are clearly influenced by experienced materialisation of risk. Discounted cash flow (DCF)-based valuation is state of the art in this valuation, while encountered risks are adjusted either in the cash flows or in the applied discount rate. The internal rate of return (IRR) approach is most frequently applied, predominantly within a simplified flow to equity (FTE) valuation approach. Market participants surprisingly still use the weighted average cost of capital (WACC) of the investing company, mostly as a basis for defining hurdle rates. For assessing investments' value protection abilities and performing impairment tests, the less known but more consistent DCF-based certainty equivalent (CE) and adjusted present value (APV) approaches could be introduced.

The Victory of Hope Over Angst? Funding, Asset Allocation, and Risk-Taking in German Public Sector Pension Reform

Public employee pension systems have traditionally been of the pay-as-you-go defined benefit (DB) variety, where retiree payments are financed by taxes (contributions) levied on the working generation. The same holds for Germany, where civil servants are promised a (mostly) unfunded, noncontributory, tax-sponsored DB pension, representing substantial liabilities currently not recognized as explicit obligations to the public sector. This paper analyzes the risks and rewards of moving to a (partially) prefunded pension system for most civil servants in the German federal state of Hesse. First, we conduct an actuarial valuation of pension promises to retired and active civil servants, which we conservatively put at € 44 billion in present value, or about 150 percent of explicit state debt. Second, we project 50 years into the future and estimate the payroll-related contribution rate sufficient to fund the civil servant pension obligation. Next, using a Monte Carlo framework and a stochastic present value approach, and a Conditional Value at Risk measure, we identify an asset allocation for plan assets that minimizes worst-case pension costs. Prefunding the pension with a tax worth about 20 percent of payroll, and investing the assets 30 percent in equities and 70 percent in bonds, substantially reduces expected and minimizes worst-case pension costs. Finally, we illustrate contribution rates and asset allocation when the plan sponsor is limited to a particular risk budget. In one interesting case, current taxpayers are asked to pay additional regular contributions of only 15 percent while the portfolio is held 43 percent in equities. This mix allows future generations to benefit from possible contribution holidays and withdrawals, while providing an acceptable level of risk of supplementary contributions resulting from underfunding.

Valuation, Personal Taxes, and Dividend Policy Under Passive Debt Management

We derive consistent valuation models in accordance with the flow to equity and adjusted present value approaches, which allow accounting for the firm’s dividend policy and passive debt management in light of differentiated personal taxes at the equity investor level. Specifi-cally, we establish appropriate adjustment formulas for the relationship between the firm’s unlevered and levered cost of equity, which are the basis for the unlevering and relevering of beta factors. Furthermore, using simulations, we show that dividend policy has a significantly positive effect on equity market value.

Net Social Impact of Illegal Unconventional Onshore Tin Mining in South Bangka, Bangka Island

Various economic, social, and environmental costs and benefits in illegal unconventional tin mining in Bangka Island have not been mapped clearly. The objective of this study is to obtain information on the economic, social, and environmental costs and benefits incurred by these mining activities expressed in monetary terms. The researcher conducted a field research in three mine villages and interviewed the miners, village government apparatus, and community leaders to map the impacts in the area. The benefits are the income and the growth of sales business, while the incurred costs include the flow of cash towards investors outside the village and the cost of river revitalization, land reclamation, watershed rehabilitation, and flood emergency response. Limited disclosure of data by the mining community and the lack of data available have yielded little cost benefit calculation. Net Present Value (NPV) approach was used to measure net social impact by assessing the profitability of mining, its benefits for the mining community, and the losses incurred by cost of investors and land reclamation. The results of calculation were positive, suggesting that unconventional mining had a significant economic impact at the local level. However, there needs to be further cost analysis of broader environmental damages.

A continuous‐time Markov chain model for redundancy allocation problem: An economic analysis

AbstractReliability of an engineering system can be improved by investing on redundant (spare) parts. However, the cost‐efficiency of such an investment is a significant concern that needs to be taken into consideration in practice. To do so, a continuous‐time Markov chain (CTMC) model is presented in this paper to analyze the system's reliability by allocating redundant components. The developed model can also capture the system's repair and failure conditions by defining appropriate states in CTMC. Subsequently, the net present value (NPV) approach is utilized for a variety of scenarios to investigate the effectiveness of investment on spare parts using the break‐even point (BEP) analysis. Afterwards, a comprehensive analysis is carried out to examine the impact of input parameters including interest rate, initial cost of investment, and periodic profit on the decision making process to find the optimal number of spare parts.

Institutional Direction of Geospacial Information for Supporting Development Equality

Spatial inequality occurs because the rate of availability of geospatial data has not been able to catch up and meet user needs. The root of the problem occurs because the network nodes in the area have not yet been formed or dissolved. The institutional status of network nodes at the provincial level as of October 2018, only 20 out of 34 provinces are operational, with 4 institutional options, namely UPT, Bappeda, Ad Hoc Regional Secretary and Ad Hoc Diskominfotik. This triggered anxiety for 14 regions that had not yet formed network nodes and 3 other UPTDs that were still awaiting evaluation results. To determine the institution of ideal geospatial information, BIG has conducted a study of institutional arrangements to realize effective and efficient regional apparatus organizations according to their duties and functions. The study with qualitative research methods was carried out by analyzing criteria and rating on institutional aspects in order to strengthen IDSN, based on applicable policies and laws as well as the results of the network node operationalization questionnaire in the province. Furthermore, the study was strengthened using quantitative research methods by comparing the costs and benefits of each institutional option (cost and benefit analysis) through the net present value approach. The results of the two methods are 2 alternative institutional geospatial information with the best value, namely Option 1 UPTB (Ideal for the long term) and Option 3 Ad Hoc in Regional Secretary (Quick Win for the medium term).

Measuring Digital Economy in National Accounts

The paper addresses methodological and practical issues of statistical evaluation of the digital economy in macroeconomic calculations. The UN Statistical Commission has determined the statistical description of digitalisation processes as one of the priorities of the SNA research programme.The author examines the problems and structure of Digital Economy Satellite Account (DESA) proposed by OECD as a complex tool for measuring digitalisation processes. Compiling this account will enable statisticians to evaluate all measurable phenomena in a digital economy and expand the production boundaries by including free digital services into the evaluation.Compilers of the new SNA satellite account now focus on Digital Supply and Use Tables (DSUT) that play the role of core structure for the future DESA. In the process, the traditional SUT structure is revised by including new groups of specific products and extracting digital components of several products of CPA classification. Moreover, developers add new industries that form by reclassifying producer units en­gaged in digital production.The author explores the issue of measuring «digital» value added and outlines approaches to solving it used, for example, by the US Bureau of Economic Analysis. He also gives a summary of the relevant methodological challenges affecting DESA compilation.Special attention in the paper is paid to the problem of valuation of data (information) which is not covered by the existing 2008 SNA methodology. The author proposes to evaluate data as a non-produced asset, using the Net Present Value (NPV) approach. According to it the value of information (non-produced asset) at a specific moment is equal to the difference between the sum of discounted future incomes of the organisation and the value of its fixed capital. Such an approach could be applied to the valuation of data used as a principal subject of activity by organisations producing digital products.The paper also presents various aspects of statistical evaluation of free digital products.It is the author’s opinion that approaches to statistical evaluation presented in this article could serve as a basis for creating the system of such measures in the Russian Federation.

Techno-economic feasibility assessment of calcium looping combustion using commercial technology appraisal tools

Calcium looping combustion (CaLC) is a new class of lowCO2emission technologies for thermochemical conversion of carbonaceous fuels that can help achieve the emissions reduction targets set out in the Paris Agreement. Compared to mature CO2 capture technologies, which cause net efficiency penalties higher than 7% points, CaLC results in a net efficiency penalty of 2.9% points. However, a thorough economic assessment of CaLC needs to be undertaken to evaluate its economic viability. The levelised cost of electricity is commonly used to assess the economic performance of clean energy systems. However, this method does not account for commercially important parameters, such as tax, interest, and depreciation charges. This study aimed to improve the reliability and accuracy of economic assessments of clean energy systems by implementing the net present value (NPV) approach. This approach was applied to assess the economic performance of two concepts of the CaLC-based power plant with either the conventional steam cycle (SC) or the supercritical CO2 cycle (s-CO2) for heat utilisation along with the bottom-up approach to total capital cost estimation. A parametric study for both concepts was also conducted to assess the impact of the key thermodynamic parameters on the economic performance. Although the s-CO2 case with revised assumptions was shown to result in a 1%-point lower net efficiency compared to the SC case, its break-even cost of electricity was lower by 0.81 €/MWh. Further improvements of the techno-economic performance can be sought by optimisation of the s-CO2 cycle structure.

Economical Analysis of Alternative Uses of Biogas Produced by an Anaerobic Digestion Plant

In the frame of the Italian market and regulations, some alternative uses of biogas produced by an anaerobic digestion plant fuelled by zootechnical effluents, integrated with corn silage, are investigated. In particular, on the basis of an existing plant, the following alternatives to the use of the generated biogas are analyzed and compared under the economical point of view: This comparison is carried out considering the technical differences between the three alternatives, as well as the related investment and operative costs. A sensitivity analysis on the main parameters influencing the payback time of the three alternatives has been also carried out, showing that the most important parameter to consider is the cost of energy (as either electric or biomethane vector). On these grounds, using the Net Present Value approach, an assessment of the most convenient option in terms of shortest payback time and highest returns is made.

Optimising Contribution Rate for SOCSO’s Invalidity Pension Scheme: Actuarial Present Value (APV)

This study proposes the optimization of the contribution rate for Social Security Organization (SOCSO)’s Invalidity Pension Scheme (IPS). This study aims to statistically analyses the current situation of the contribution fund collection and the claim benefits payment under SOCSO’s IPS. It seeks to develop an actuarial formulation based on the benefits coverage from SOCSO’s IPS. It attempts to determine an optimal contribution rate to support the benefits provided under SOCSO’s IPS using an actuarial approach. It proposes an appropriate contribution rate to be implemented by SOCSO. Currently, the contribution rate for SOCSO’s IPS is 1%, which is shared equally between employer and employee. This contribution rate is directly deducted from the employee’s monthly gross salary. This contribution rate needs to be adjusted upwards by SOCSO soon to ensure that all payments of claims are sufficiently covered. Based on the 9th Actuarial Valuation Report issued by the International Labour Organization (ILO), recent statistics show that immediate revision of contribution rate is necessary to achieve the minimum loss ratio (max 20%) in SOCSO’s IPS funding systems. In this study, the Actuarial Present Value Approach is applied to all benefits under SOCSO’s IPS. SOCSO data from 1985 until 2014 are used in this study. Seven assumptions are made in this study namely mortality rate, salary ceiling, interest rate, retirement age, increment salary rate, age entry, and salary entry. By optimizing the worst-case scenario (single simulation), this study has found that the optimal contribution rate is 2.2% rather than the current 1%. This can be attributed to the fact that since 1969, many changes have occurred in the workplace, working conditions are different and many new jobs have been created. Therefore, an Actuarial Present Value Approach with regards to actuarial modeling was conducted to optimize SOCSO’s IPS contribution rate. In conclusion, an optimal contribution rate of 2.2% should be introduced and implemented in the future as part of the efforts to reduce society’s burden whilst ensuring that adequate protection is provided to the nation’s workforce.

Identifying Bubbles in China’s Property Market for Consumer Financial Well-Being

A sharp increase in Chinese house prices combined with the extraordinary lending growth during the 2000 s has led to concerns of an emerging real estate bubble and impairment of consumer financial well-being. This article studies real house prices relative to fundamental house values. Housing constitutes a large fraction of most household portfolios therefore affect household well-being, and its characteristics are in contrast to what prevails in most financial markets as arbitrage is limited, and hence correction toward fundamental values can be a prolonged process. Using a time-varying present value approach, our findings suggest evidence of bubbles in the Chinese housing market nationally and in representative cities using real-term data. We also find that price dynamics have an important role to play in determining house prices. Moreover, the results reveal that the dominant driving force of house price deviations from fundamental values might be the less than fully rational behavior of investors rather than fundamental factors. This seems plausible in an emerging market such as China.

Market driven ship investment decision using the real option approach

This paper analyzes ship investment behavior where the main driving force is future freight earnings. The shipping market is cyclic and uncertain, and the decision is whether to invest ships now or later. Theoretically, we found the trigger rates—the necessary freight rates for profitable ship investment—for both the net present value (NPV) and real option approach (ROA), assuming that future freight earnings follow a mean reverting stochastic process. The combination of these trigger rates provides the necessary and sufficient conditions for immediate investment. Empirically, we estimated the trigger rates for the whole sample from January 1976 to July 2014, as well as sub-samples that take into account structural changes in the shipping market. Both theoretical and empirical results show that ship investment decisions can be made based on the relationships between the current freight rate and the trigger rates from NPV and ROA. If the freight rate cannot make NPV positive, no investment should be considered. Immediate investment is only recommended when the freight rate is higher than the trigger rate using ROA. Sensitivity analysis shows that the trigger rate is most sensitive to changes in the long-run mean of the freight rate. A simple regression analysis indicates that our model can explain market driven ship investment activities in the past. In addition, results that incorporate structural breaks in the shipping market are closer to actual investment behavior in the market.

Economic feasibility of feed-in tariff (fit) for biomethane injection into natural gas distribution grid

Feed-in Tariff (FiT) is a policy mechanism designed to promote investment in renewable energy technologies. Despite the successful implementation of FiT mechanism for renewable electricity generation in Malaysia since 2011, FiT for renewable gas, biomethane injection into the natural gas grid remains unexplored. This study aims to identify the financial feasibility of biomethane injection into natural gas grid by proposing FiT rate. Net Present Value (NPV) approach is used to calculate the FiT rate for the first five years of biomethane injection into natural gas distribution grid (NGDG), under 8 % degression rate. Preliminary results identified that FiT rate of 40.81 to 227.85 MYR/GJ for biomethane production plants within 1,000 m from the injection point at 4 different sizes: 250 m3/h, 500 m3/h, 750 m3/h and 1,000 m3/h. Biggest plant size (1,000 m3/h) shows lowest FiT rate (40.81 MYR/GJ), although the FiT rate is almost double the piped gas price, 28.85 MYR/GJ. Judging from the trend of increasing piped gas price, along with government subsidy rationalisation plan, it is foreseen that biomethane, under proper policy regulations and FiT mechanism, can be a competitive renewable gas as natural gas. Recommendations are discussed and provided for successful implementation of biomethane injection into the grid.

Expected returns and expected dividend growth in Europe: Legal origin, institutional, and financial determinants

AbstractThis paper uses a present value approach to show that price movements for equity indices in a sample of European stock markets can be traced to legal origin, institutional, and corporate financial factors. The present value literature states that stock indices move due to changes either in discount rates, dividend growth, or a combination of the two. Empirically, little is known about the mechanism through which legal, institutional, and corporate financial factors influence these variables, especially in a European context. The current paper attempts to plug this gap in the literature. Using the state space approach, we show that although expected returns are highly persistent, expected dividend growth tends to vary across the sample. Movements in markets are mainly due to changes in the discount rate. However, there appears to be a difference in the proportion of movements attributable to discount rate and dividend growth components. Stock markets in civil law countries tend to have a stronger link with the dividend growth variables as well as market size and activity measures. Expected dividend growth is also driven by profitability factors in both types of country. By contrast, there is no strong evidence of corporate indicators influencing expected returns.