Product Overview

This case is suitable for graduate-level quantitative analysis, business and government, environment and sustainability, and global economics courses. Students must consider the tradeoffs between continuing to run an old coal-burning plant and purchasing emissions allowances (EAs) versus upgrading to emissions-reducing wet or dry scrubbers. Reducing emissions creates the possibility of selling the plant’s surplus EAs (which are likely to increase in price). Choosing a wet or dry scrubber requires considering installation cost and construction time, variable cost, and SO2 removal efficiency. Ideally, the investment should pay back over time, but management believes some net investment could also be justified. For that, however, complete analyses from both economic and environmental perspectives are required. A supplemental spreadsheet is available to accompany the case (UVA-QA-0726X).

Learning Objectives

This case is designed to reinforce basic modeling skills. Students will (1) recognize the problem, objective(s), alternatives, and relationships between various facts presented in the case; (2) create a spreadsheet model that embeds these relationships and computes the performance metric(s) for different alternatives—specifically, multiple-period pro-forma income statements and projects’ NPVs; (3)inderstand the flaw of averages (Jensen’s inequality) and reinforce the problem it creates for decision-making under uncertainty and risk; (4) practice decision-making under uncertainty—in particular, using simulation models; (5) master multiple regressions skills, model-building (variable selection), and using regression to provide distributional inputs into simulation models; (6) practice implementing threshold-dependent decision strategy; practice interpreting the threshold and the corresponding strategy; (7) provide illustration for multiple-objective, multiple-stakeholder decision-making.