Optimizing Two-Stage Modular Wastewater Plant Expansions Using Numerical Methods and Simulation in A Real Options Context

Abstract

The optimization of a modular expansion strategy, while extremely relevant in the industrial setting, requires sophisticated numerical modeling for the valuation of even simple scenarios. In this work, we develop both a numerical model and a model based on Monte-Carlo simulation utilizing real options, to provide a methodology for optimizing a plant expansion strategy. Our case study is associated with a wastewater treatment plant expansion; however, the methodologies developed here can be extended to many industrial settings, including mining, oil and gas, and manufacturing. The value of the Monte-Carlo simulation is that it is much more easily understood by practitioners and more versatile in that it can be used to model non-standard processes. The results of both of our models match consistently, essentially validating the Monte-Carlo technique.

Keywords: real options, optimization, modular expansion, wastewater treatment, Monte-Carlo simulation