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Investing in Time-to-Build Projects With Uncertain Revenues and Costs: A Real Options Approach

Lauri Kauppinen,A. Siddiqui,Ahti Salo

Published 2018 in IEEE transactions on engineering management

ABSTRACT

Lagging public-sector investment in infrastructure and the deregulation of many industries mean that the private sector has to make decisions under multiple sources of uncertainty. We analyze such investment decisions by accounting for both multiple sources of uncertainty and the time-to-build aspect. The latter feature arises in the energy and transportation sectors, because investors can decide the rate at which the project is completed. Furthermore, two explicit sources of uncertainty represent the discounted cash inflows and outflows of the completed project. We use a finite-difference scheme to solve numerically the option value and the optimal investment threshold. Somewhat counterintuitively, with a relatively long time to build, a reduction in the growth rate of the discounted operating cost may actually lower the investment threshold. This is contrary to the outcome when the stepwise aspect is ignored in a model with uncertain price and cost. Hence, research and development efforts to enhance emerging technologies may be more relevant for infrastructure projects with long lead times.

PUBLICATION RECORD

  • Publication year

    2018

  • Venue

    IEEE transactions on engineering management

  • Publication date

    2018-03-12

  • Fields of study

    Engineering, Business, Computer Science, Economics

  • Identifiers
    DOI 10.1109/TEM.2018.2803304
  • External record

    Open on Semantic Scholar

  • Source metadata

    Semantic Scholar

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