Optimal economic project selection under uncertainty: An illustration from an utility company
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The problem of selection and management of projects is common in the planning process of private and public companies and is required to manage and allocate scarce resources usually between alternatives that differ in technical, operational, and financial aspects, in addition to the level of risk. This article presents an application of a portfolio optimization problem of projects under uncertainty and budget constraints. Firstly, it addresses the problem using as the objective function the maximization of the Expected Net Present Value (ENPV) of the portfolio of projects. Secondly, the objective function is the maximization of two indicators of risk associated with the portfolio ENPV: Maximizing the Net Present Value (NPV) of the portfolio for a certain level of centainty and maximizing the probability of obtaining a feasible portfolio in economic terms. The methodology was developed in the framework of a research project funded by an utility company. To illustrate the proposed methodology, a suitable example, which assumes that the company can partially allocate resources to several projects from a pool of independent investment alternatives was used. New developments in the area of stochastic optimization can help to improve the quality of decisions to allocate limited financial resources, through the use of performance indicators related directly to the company's strategy. The results show the optimal allocation of financial resources to each project taking into account the uncertainty associated with different input variables, which are mompanies and is required to manage and allocate scarce resources usually between alternatives that differ in technical, operational, and financial aspects, in addition to the level of risk. This article presents an application of a portfolio optimization problem of projects under uncertainty and budget constraints. Firstly, it addresses the problem using as the objective function the maximization of the Expected Net Present Value (ENPV) of the portfolio of projects. Secondly, the objective function is the maximization of two indicators of risk associated with the portfolio ENPV: Maximizing the Net Present Value (NPV) of the portfolio for a certain level of centainty and maximizing the probability of obtaining a feasible portfolio in economic terms. The methodology was developed in the framework of a research project funded by an utility company. To illustrate the proposed methodology, a suitable example, which assumes that the company can partially allocate resources to several projects from a pool of independent investment alternatives was used. New developments in the area of stochastic optimization can help to improve the quality of decisions to allocate limited financial resources, through the use of performance indicators related directly to the company's strategy. The results show the optimal allocation of financial resources to each project taking into account the uncertainty associated with different input variables, which are modeled using empirical probability distributions defined a priori by the analyst.
- Diego Fernando Manotas Duque, Pablo César Manyoma, La Evaluación de Proyectos de Inversión Mediante Opciones Reales: Aspectos Conceptuales , Ingeniería y Competitividad: Vol. 3 No. 1 (2001)
- Andrés Oviedo-Gómez, Sandra Milena Londoño-Hernández, Diego Fernando Manotas Duque, Electricity Price Fundamentals in Deregulated Markets: A Bibliometric Analysis , Ingeniería y Competitividad: Vol. 24 No. 1 (2022): Ingenieria y Competitividad
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