Financial Risk Assessment for Power Plant Investment under Uncertainty Using Monte Carlo Simulation

Financial analysis is an important part of a feasibility study for an investment. In order to show that an investment is profitable or not, normally people use some methods such as Net Present Value (NPV), Payback Period, Benefit/Cost Ratio (B/C Ratio), Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR). However, many people who work as a financial analysis normally only use a deterministic approach when they did a feasibility study for investment. In fact there are many uncertainty factors, i.e. exchange rate, in financial analysis of feasibility study. This uncertainty factors can be considered as risks. Many previous researches have been trying to capture this phenomenon. They use the Monte Carlo Simulation called NPV@risk. Unfortunately, the NPV@Risk uses paid license software called @Risk. And for some people or institution who cannot afford it, it could be a problem. Furthermore, in 2018, the ISO replace ISO 31000:2009 with the ISO 31000:2018. Thus, this research is an update of the previous research who work on integration of Risk Management framework and NPV@risk (Monte Carlo Simulation) using a free license software for Monte Carlo. To test the method, the case of power plant investment in 2007 is used. We use some variable, identified as risk, such as coal price, exchange rate, fuel price, etc. Using our proposed framework, one can capture that the impact on an increase of coal price leads to a catastrophic consequence. Furthermore, based on our risk map, the increase of coal price can be identified as a catastrophic risk. Thus, one could propose a long term contract of coal price in order to mitigate this type of risk and increase the success rate of the project.