Ashuri, B; Lu, J and Kashani, H (2011) A real options framework to evaluate investments in toll road projects delivered under the two-phase development strategy. Built Environment Project and Asset Management, 1(1), pp. 14-31. ISSN 2044-124X
Abstract
Purpose: This paper aims to present a financial valuation framework based on the real options theory to evaluate investments in toll road projects delivered under the two-phase development plan. Design/methodology/approach: The approach is based on applying the real options theory to evaluate investments in toll road projects. In particular, the risk-neutral valuation method is used for pricing flexibility embedded in the two-phase development plan. Risk-neutral binomial lattice is used to model traffic uncertainty and to find the optimal time for the toll road expansion. Probabilistic life cycle cost and revenue analysis is conducted to characterize the investor's financial risk profile and determine the flexibility value of the expansion option. Findings: The flexible, two-phase development plan can improve the investor's financial risk profile in the toll road project through limiting the downside risk of overinvestment (i.e. decreasing the probability of investment loss) and increasing the expected investment value in a highway project. Social implications: Private and public sectors can benefit from this valuation framework and use tax dollars and users' fees effectively through avoiding overinvestment in toll road projects. Originality/value: The framework consists of several integrated features, which distinguish it from existing investment valuation models. The risk-neutral valuation method for pricing flexibility embedded in the two-phase development plan is applied. This real options framework is capable of characterizing traffic boundary, at which it is optimal for the investor to expand the toll road. Further, this framework provides the likelihood distribution of when the investor may expand the toll road.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | binomial lattice; expansion option; financial risk; flexibility; optimal expansion time; real options analysis; risk-neutral valuation method; road transport; toll road; two-phase development plan |
| Index terms: | pricing, investor, revenue, life cycle cost, toll, public sector, strategy, methodology, highway construction, option, valuation method, road project, real options analysis, real option |
| Subjects: | sociology, decision analysis, administrative law, transportation engineering, management, research methods, civil engineering, infrastructure engineering, real estate economics, economic analysis, design economy |
| Topics: | Research Practice, Engineering Principles, Business Strategy, Stakeholder Management, Risk Management, Design Practice, Legal Issues, Urban Studies |
| Descriptive scope: | 3 PCT |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here