Valuing uncertain asset cash flows when there are no options: A real options approach

The real option valuation method is often presented as an alternative to the traditional discounted cash flow (DCF) approach because it is able to quantify the additional asset value arising from flexible asset management. However, these two valuation methods differ on a more fundamental level: their approach to determining the effects of cash flow uncertainty on asset value. Real option valuation adjusts for risk within the cash flow components while the DCF method discounts for risk at the aggregate net cash flow. This seemingly small difference allows the real option method to differentiate assets according to their unique risk characteristics, while the conventional DCF approach cannot.This paper presents an overview of the real options and conventional DCF frameworks for valuing uncertain cash flows. To emphasize the approaches' different treatment of risk we assume an absence of managerial flexibility. Using simple algebra, this paper demonstrates that the traditional DCF method fails to adequately discount net cash flow risk, no matter what discount rate is used. Finally, in a stylized mining example we show that DCF rules would lead a developer to forego $24.5 million in value creation, at a profitability index of 1.49, by making a poor investment decision.     

SAMPLE UNCERTAINTY IN FLOOD LEVEE DESIGN: BAYESIAN VERSUS NON-BAYESIAN METHODS1

ABSTRACT: Bayesian and non-Bayesian flood levee design methods that account for the uncertainty due to limited record length are compared using a case study. The first method, Bayesian decision theory (BDT), imbeds the uncertainty in the parameters of the yearly peak stage into a loss function. The optimum design of the flood levee, called Bayes design, corresponds to the minimum expected loss, called Bayes risk. The second method, induced safety algorithm (ISA), computes a margin of safety to be added to either an existing levee or a levee designed by classical benefit-cost analysis. The design decision is shown to fluctuate as different record lengths are considered. For short record lengths, BDT, which takes small sample bias into account, appears to yield a more conservative design than ISA. On the other hand, ISA, which is simple to implement, seems to be preferable to BDT for longer record lengths.     

Diel and tidal cycles regulate larval dynamics in salt marshes and mangrove forests

Variation in the release and recruitment of larvae of estuarine invertebrates affects the distribution and abundance of adults, as well as trophic interactions in both the plankton and the benthos. Larval release and supply are often timed to environmental cycles such as the diel and tidal cycles. Here, we determined using plankton tows whether the abundance of larvae spanning salt marsh and mangrove habitats across the intertidal landscape varied with diel and tidal cycles. Using three different sampling designs across two sites and within each of two estuaries over a 12-month period, we covered a range of spatial and temporal scales. This allowed us to test the general prediction that densities of meroplankton in the water column would be greater during nocturnal ebb tides than during other phases of the diel or tidal cycle. As predicted, nocturnal ebb tides yielded the highest densities of meroplanktonic larvae and were dominated by first-stage crab zoeae and this finding was most pronounced in the salt marsh. Throughout the course of the year, greater numbers of meroplankters consistently occurred during the ebb tide compared with the flood tide. The densities of other taxa (e.g. gastropods and polychaetes) showed no clear trends with diel or tidal cycles. This study highlights the effects of these pervasive physical cycles on the timing of larval release and supply in the salt marsh–mangrove complex, and emphasises their contribution to the trophic interactions and the dynamics of benthic populations within estuaries.     

Impact of water on CO2 capture by amino acid ionic liquids

The reversible capture of CO₂ from fossil-fueled industries and the absorption of CO₂ for natural-gas-sweetening purposes are industrial issues closely related to very important environmental, economical, and technological concerns. Biological amino acids can be used for task-specific ionic liquids for reversible CO₂ capture. Several groups have reported efficient and reversible CO₂ capture by such ionic liquids under rigorously dry conditions. However, we have observed that CO₂ capture by amino acid ionic liquids is hugely impacted by the presence of water. In addition, the amino acid anions appear to play only a transitory role in the CO₂ capture in the first minutes of exposure to a wet CO₂ stream. Here, we studied the interaction of two ionic liquids—tetramethylammonium glycinate ([N₁₁₁₁][Gly]) and tetraethylammonium prolinate ([N₂₂₂₂][Pro])—with CO₂ under wet conditions, by ¹³C-NMR. Results show that CO₂ is initially captured in a carbamate form by the amine-functionalized anions of these salts. This capture mode is unambiguously confirmed by a single-crystal X-ray study of the CO₂-ionic liquid complex. However, in solution, as additional CO₂ is added, the carbamate releases the covalently bound CO₂, and the CO₂ remaining in solution shifts in form to an equilibrium mixture of carbonate and bicarbonate. Indeed, when the amount of CO₂ present in the system exceeds about one-half mole per mole of ionic liquid present, the ionic liquid–carbamate complex is detected in only trace amounts, and the neutralized amino acids are readily identifiable by NMR.     

A case study of urban heat islands in the Carolinas

Urbanization tends to aggravate the negative effects of climate. The objective of this research is to aid in the understanding of the spatial variation of urban heat islands within selected cities in North and South Carolina. This understanding will help guide efforts to cool cities in order to increase human comfort, conserve energy and resources, and reduce air pollution in both of these states.