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A real options approach to investing in the first nuclear power plant under cost uncertainty: comparison with natural gas power plant for the Tunisian case

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This paper uses a real options approach to present a method for evaluating the first Nuclear Power Plant (NPP) investment in Tunisia in 2020. The evaluating model integrates the value of real options: option to wait in the standard discount cash flow analysis. According to the IAEA (2007), starting the first stage of a nuclear power programme makes it possible to construct the first NPP in second time. This study considers that the economic worth of the NPP investment depends on the production cost of the natural gas power plant. This study assumes that the profit realised by the NPP project, defined as the difference between natural gas and nuclear production costs, represented the cash flow of the NPP investment. However, the value of this cash flow is uncertain. This is an investment choice problem under uncertainty. The analysis proposes the optimal investment strategy in NPP project for the Tunisian government. Furthermore, the threshold value of investment cash flow defining the timing of starting NPP construction is calculated. [Received: July 10, 2008; Accepted: November 23, 2008]

Keywords: real options, nuclear power, investment, natural gas, production costs, cost uncertainty, nuclear energy, Tunisia

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