n African Finance Journal - Valuation of a hydro-electric power project in emerging markets : an application of real options
|Article Title||Valuation of a hydro-electric power project in emerging markets : an application of real options|
|© Publisher:||AfricaGrowth Institute|
|Journal||African Finance Journal|
|Affiliations||1 Pace University, USA|
|Publication Date||Jan 2012|
|Pages||1 - 36|
|Keyword(s)||Cost of capital, Emerging markets, G13, G24, G31, G32, Hydro-electricity, Investment, Project finance, Real options and Valuation|
We apply a contingent-claims technique and demonstrate how to value an emerging market hydro electric power investment under uncertainty. The investment project depends on reliable weather conditions and the capacity of a river to drive the water turbines. Uganda's Bujagali dam project located at the source of the Nile River is the focus of our study. We identify four mutually-exclusive real options and incorporate the correlation of returns on rainfall and cash flows as well as a premium for lack of transparency in the estimation of project risk. We document a leverage effect and a volatility effect on project value.
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