Real Option to Defer Investment in Wind Farm in Colombia.

The traditional method of valuation of projects such as the Net Present Value does not manage to quantify the managerial flexibility. Among the methods, the Real Options Approach (ROA) stands out. The ROA is an adaptation to the theory of financial options applied to the valuation of real or physical assets. The ROA is ideal for valuing investment projects in uncertain environments because it is capable of determining the economic value of the management flexibility that is carried out through management options that modify, abandon or differ the investment project. This paper uses the ROA in the valuation of a wind farm in Colombia considering the Real Option to defer. The price of electric power and the price of CER bonds were modeled with the Geometrical Brownian Motion, these variables were identified as the main source of risk in wind farms in Colombia. The results show that the cash flow of the wind farm has a high volatility, so the Real Option to defer the project for up to ten years takes a value greater than the Net Present Value. [ABSTRACT FROM AUTHOR]

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