Evaluating sustainable retrofits in existing buildings under uncertainty

This paper presents a quantitative approach to determining the value of the investment in sustainable retrofits for existing buildings by taking into account different uncertainties associated with the life cycle costs and perceived benefits of the investment. To achieve this objective, principles from modern option pricing theory in finance are used to augment the traditional net present value method. In particular, an analogy between investment in sustainable building retrofits and American option is established and used to develop a framework for single or multi-phase investment evaluation. The parameters of the proposed framework are determined using the capital asset pricing model. The case study example illustrates that the proposed methodology provides the decision maker with managerial flexibility to determine, prioritize and evaluate the required retrofits over time. Retrofit measures that can be implemented without delay are distinguished from those that can be delayed because more information can be obtained in the future, or their implementation is contingent on successfully implementing other retrofit measures first.

► Investment in existing building sustainable retrofits is uncertain.
► A quantitative framework to determine value of this investment is developed.
► Framework is established based on an analogy with perpetual American options.
► Framework evaluates flexibility in single and multi stage investments.
► Example illustrates that framework provides managerial and strategic flexibility.