TY - JOUR
T1 - Compound deferrable options for the valuation of multi-stage infrastructure investment projects
AU - Huang, Yu Lin
AU - Lin, Tsen Chin
N1 - Publisher Copyright:
© 2023 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2023
Y1 - 2023
N2 - Multi-stage planning is common for expanding infrastructure complexes or networks. Previous real-option studies developed a sequential compound call option (SCCO) for evaluating multi-stage infrastructure investment projects, including evaluating abandonment options during individual pre-scheduled investment stages. In practice, however, investment schedules involve risk and uncertainties forcing investors to change plans, raising an important issue regarding investors having more options at each commencement date. This study introduces a new model, the sequential compound deferrable call option (SCDCO), incorporating deferment options for each fold in an n-fold setting and generalizing the exercise of each deferment option into mn periods. A closed-form solution to the valuation of SCDCO is derived accordingly. A real-world case demonstrates that introducing deferment options increases project value, but the marginal benefit of increasing deferment time diminishes. The presence of dedicated assets for the usage of future expansions can also increase project value, but this increase is restricted by deferment options. Furthermore, the investment cost growth with an increase of deferment time rapidly decreases project value and vice versa. Inflation or deflation is therefore important to consider in deferment decisions. Finally, although deferment options only produce limited project value, they have the flexibility to manage risks, changes, and budgetary constraints.
AB - Multi-stage planning is common for expanding infrastructure complexes or networks. Previous real-option studies developed a sequential compound call option (SCCO) for evaluating multi-stage infrastructure investment projects, including evaluating abandonment options during individual pre-scheduled investment stages. In practice, however, investment schedules involve risk and uncertainties forcing investors to change plans, raising an important issue regarding investors having more options at each commencement date. This study introduces a new model, the sequential compound deferrable call option (SCDCO), incorporating deferment options for each fold in an n-fold setting and generalizing the exercise of each deferment option into mn periods. A closed-form solution to the valuation of SCDCO is derived accordingly. A real-world case demonstrates that introducing deferment options increases project value, but the marginal benefit of increasing deferment time diminishes. The presence of dedicated assets for the usage of future expansions can also increase project value, but this increase is restricted by deferment options. Furthermore, the investment cost growth with an increase of deferment time rapidly decreases project value and vice versa. Inflation or deflation is therefore important to consider in deferment decisions. Finally, although deferment options only produce limited project value, they have the flexibility to manage risks, changes, and budgetary constraints.
KW - compound option
KW - multi-stage investment
KW - option to defer
KW - project valuation
KW - Real option
UR - http://www.scopus.com/inward/record.url?scp=85152442636&partnerID=8YFLogxK
U2 - 10.1080/01446193.2023.2190993
DO - 10.1080/01446193.2023.2190993
M3 - Article
AN - SCOPUS:85152442636
SN - 0144-6193
JO - Construction Management and Economics
JF - Construction Management and Economics
ER -