R&D investment decision on smart cities: energy sustainability and opportunity

Public administrations frequently tend to make communities as much sustainable aspossible pursuing smart city goals. Solar energy investments represent a validopportunity to support smart cities and consequently the sustainable economicdevelopment. The valuation of these projects is not a simple task considering theirsequential nature and riskiness. This article proposes a compound Real OptionsApproach (ROA) as a tool for potential investors to make a conscious R&D renewableinvestment decision on smart cities. In this sense, we fit the compound ROA with theframework of a typical smart city project in solar energy field. We also provide a casestudy to make a comparison between classical Expected Net Present Value (ENPV)approach and compound ROA. The results show that ENPV underestimates theproject value, whereas compound ROA allows to obtain a more attractive valuation ofthe project by embedding in the analysis the managerial flexibility value.