Research paper understanding- L4 Risk of single tech

Question 1

What are the risk and uncertainty of technology

Answer 1

• Additional investments in human capital.
• Higher degree of irreversibility.
• Uncertainty about performance, profitability, lifetime, and maintenance cost.

Question 2

How do the researchers opinions differ?

Answer 2

• Mansfield (1968)- emphasizes on risk and uncertainty and reductions therein as the driving force.
• Stoneman (1980)- sees the firm choosing an optimum portfolio of technologies.
• Myers (1974)- presents application of real option approach to real assets.

Question 3

What was the paper and who were the authors?

Answer 3

: Valuing flexibility in utility planning, Thomas W Kaslow and Robert S. Pindyck, 1994.

Question 4

What was the motivation for the paper?

Answer 4

• Utility industry is undergoing structural changes (streamlining, reorganization, cost cutting, and emphasis on marketing and customer service.
• The utility industry is also subject to increasing uncertainty, through deregulation of the energy sector and evolving environmental requirements.
• The magnitude and scope of business uncertainties in the utility industry require improved evaluation techniques and flexible investment alternatives as resource options.

Question 5

What was the methodological approach?

Answer 5

• It applied NPV (net present value) against ROA (real options approach) with two alternatives:
  1. Long term solution- purchase and install non-fossil resource.
  2. Short term solution- purchase power contract from a neighbouring utility.

Question 6

What were the results of the paper?

Answer 6

• The NPV of alternative 1 (long term solution) is better than the alternative 2 (short term solution).