Integrating carbon market uncertainties into a sustainable manufacturing investment decision: A Bayesian NPV approach

Dileep Dhavale, Joseph Sarkis*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

7 Citations (Scopus)

Abstract

Net present value (NPV) is a widely used technique in capital budgeting. In this paper, we develop a Bayesian NPV framework using a Gibbs sampler. This approach allows decision-makers to integrate their knowledge, past experience, and uncertain and volatile cash flows from carbon emissions credits into decisions dealing with energy efficient, sustainable manufacturing equipment. The results indicate NPV is highly dependent on the nature of volatility and uncertainty of the cash flows. Without inclusion of this information through the Bayesian framework results, NPV becomes overstated, and thus it may provide biased guidance for the investment. The results developed in this paper further show that the frequency of very high and low cash flows and to a lesser degree their variability adversely impacts NPV. The results may also explain reasons for the economic phenomenon known as the energy efficiency gap.

Original languageEnglish
Peer-reviewed scientific journalInternational Journal of Production Research
Volume53
Issue number23
Pages (from-to)7104-7117
Number of pages14
ISSN0020-7543
DOIs
Publication statusPublished - 09.03.2015
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • net present value
  • Carbon emission credits and offsets
  • Bayesian analysis
  • sustainable manufacturing
  • investment appraisal
  • Gibbs sampler

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