Real Options Approach versus Conventional Approaches to Valuing Highway Projects under Uncertainty
Publication: Journal of Construction Engineering and Management
Volume 145, Issue 11
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.
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Data Availability Statement
Data generated or analyzed during the study are available from the corresponding author by request.
Acknowledgments
This work is financially supported by the Iran National Science Foundation (INSF) [Project No. 94809371].
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©2019 American Society of Civil Engineers.
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Received: Feb 18, 2018
Accepted: Mar 19, 2019
Published online: Aug 28, 2019
Published in print: Nov 1, 2019
Discussion open until: Jan 28, 2020
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