Real options approach versus conventional approaches to valuing highway projects under uncertainty

Esmaeeli, A N and Heravi, G (2019) Real options approach versus conventional approaches to valuing highway projects under uncertainty. Journal of Construction Engineering and Management, 145(11), ISSN 0733-9364

Abstract

Conventional valuation approaches - discounted cash flow - consider project alternatives as preset scenarios of predefined activities and ignore uncertainty and managerial flexibilities. The real options (RO) approach has been recently used by a large number of researchers to overcome the shortcomings of conventional approaches. This research contributes to the existing body of knowledge by presenting an innovative RO method which models flexible strategies in highway projects valuation under uncertainty through four advances over established studies. First, as well as traffic demand and time value of money, uncertainties about unit rates of agency and user costs are accounted for by a fuzzy approach. Second, flexible strategies are developed by considering the options embedded in the decision-making procedure for initial construction and rehabilitation of pavement. Third, a method is used to develop pavement performance curves based on traffic demand and corresponding effects of each construction activity. Fourth, user costs as well as agency costs are considered in analysis. Results of applying the model in a case study in Iran reveal that conventional valuation approaches may overestimate project life-cycle costs and that, in many cases, the flexibilities modeled by the developed fuzzy RO approach help managers enhance project value.

Item Type: Article
Uncontrolled Keywords: fuzzy set theory; highway project; infrastructure investment; life-cycle costs; managerial flexibility; ranking of alternatives; real options; uncertainty
Date Deposited: 11 Apr 2025 19:47
Last Modified: 11 Apr 2025 19:47