International Conference on Transportation and Development 2020
Investment Valuation of UFT Systems under Construction Cost Uncertainties
Publication: International Conference on Transportation and Development 2020
ABSTRACT
As the most transportation infrastructure projects, the implementation of a new underground freight transportation (UFT) system is an irreversible economic decision. While an economic decision to implement a UFT system is highly susceptible to construction cost contingencies, the existing UFT economic assessments do not consider such uncertainties in their investment valuations. This paper exploits a discrete real options (RO) approach to incorporate construction cost uncertainties as well as managerial decision-making flexibilities in the investment valuation of UFT systems. A dynamic programming approach is used to provide an optimal timing scheme for investment in UFT systems. An exemplary UFT investment case is used to demonstrate the implementation of the RO approach. The value of the option to invest in the UFT system is calculated at any time in the future, considering the volatility in the transportation construction market and including the value of the managerial decision-making flexibilities. This analysis also offers a construction cost threshold that makes the UFT investment economically viable. Although the net present value analysis indicates that it is beneficial to immediately invest in the studied UFT project, the RO analysis portrays how specific contingent outcomes in the transportation construction market could affect this decision. It shows waiting for predictable downturns in the construction costs could result in a more lucrative project. This paper provides transportation capital planners with a framework to objectively evaluate the investment in UFT systems under high construction cost uncertainties.
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Published In
International Conference on Transportation and Development 2020
Pages: 319 - 331
Editor: Guohui Zhang, Ph.D., University of Hawaii
ISBN (Online): 978-0-7844-8316-9
Copyright
© 2020 American Society of Civil Engineers.
History
Published online: Aug 31, 2020
Published in print: Aug 31, 2020
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