Monte Carlo methods for appraisal and valuation
Monte Carlo methods for appraisal and valuation: A case study of a nuclear power plant
David C Rode, Paul S Fischbeck, Steve R Dean. Journal of Structured and Project Finance. New York: Fall 2001.Vol.7, Iss. 3; pg. 38
David C Rode, Paul S Fischbeck, Steve R Dean
Journal of Structured and Project Finance. New York: Fall 2001. Vol. 7, Iss. 3; pg. 38
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Abstract (Document Summary)
Appraisals typically are conducted using four standard methods approved by the American Society of Appraisers. For large-scale, technically unique projects, such as chemical and power plants and old industrial facilities, these standard methods are insufficient. These types of projects contain political, technical, and economic risks that are not accounted for in standard valuation methods. To include these risks in an appraisal, a Monte Carlo simulation method can be used. Probability distributions are used to model the appropriate uncertainty. The appraisal also may include modeling future decisions that may have to be made concerning the project to add insight to the risk involved. A case study of a nuclear power plant is presented. The use of Monte Carlo methods and the modeling of future decisions decreased the worth of the plant by 28% as compared to a standard income capitalization method.