Abstract
We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit-i.e., net present value (NPV)-of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.
Original language | English (US) |
---|---|
Pages (from-to) | 267-297 |
Number of pages | 31 |
Journal | Engineering Economist |
Volume | 54 |
Issue number | 4 |
DOIs | |
State | Published - Oct 2009 |
Funding
The authors thank two anonymous referees for helpful comments that improved the article. This research was supported by the Electric Power Research Institute under contract EP-P22134/C10834, STPNOC under grant B02857, and the National Science Foundation under grants CMMI-0457558, CMMI-0653916, and CMMI-0855577. Abbreviated versions of this article have appeared in Koc¸ et al. (2007, 2008).
ASJC Scopus subject areas
- General Engineering
- Education
- Economics and Econometrics