Real option evaluation of complex infrastructure projects: The case of Dabhol Power

Cheah, Charles Y. J.; Liu, J

doi:10.1108/13664380580001064

Cited by 7 publications

(2 citation statements)

References 4 publications

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“…Paxson ( 2005) also found similar results in an application of the switching option in property investments. Cheah and Liu (2005) evaluated several options including switching of fuel in a large infrastructural power project and concluded that the switching option of fuel between gas and naphtha overtime have great influence on the cash flow of the project and amounted to about 4.2 per cent of the base NPV calculated for the project.…”

Section: Residentialmentioning

confidence: 99%

A real option approach for the valuation of switching output flexibility in residential property investment

Mintah

Higgins

Callanan

2018

JFMPC

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Purpose Uncertainties in residential property investment performance require that real estate assets are designed in a flexible manner to respond to impacts of market dynamics. Though estimating the cost of flexibility is straightforward, assessing the economic value of flexibility is not. The purpose of this study is to explore the potential practical application of real option analysis to determine the economic value of a switching output flexibility embedded in a residential property investment in Australia. The study involves the exploration of an optimal strategy for investment in a residential development through real option analysis and valuation of a mixed use investment. Design/methodology/approach The real option valuation model developed by McDonald and Siegel (1986) is adopted for the evaluation because the switching output flexibility is likened to a perpetual American call option with dividend payout. Findings Through real option analysis, the economic value of switching output flexibility of the mixed use building was determined to be higher than the initial upfront costs. Moreover, a payoff of about $4million was determined to be the value of the switching output flexibility, therefore justifying upfront investments in flexibility as an uncertainty and risk management tool. Practical implications This application is an important demonstration of the practical use of options pricing techniques (real options analysis) and delivers further evidence needed to support the adoption of real option valuation in practice. Flexibility can also enhance risks and uncertainty management in residential property investment better than the adjustment of discount rates. Originality/value There is limited evidence on the use of real options techniques for the valuation of switching output flexibility in practice, and this comes as an original application; both the case study and data are all initial applications of switching flexibility in the Australian property market.

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Section: Residentialmentioning

confidence: 99%

A real option approach for the valuation of switching output flexibility in residential property investment

Mintah

Higgins

Callanan

2018

JFMPC

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“…It is equally reasonable to assume a "3-plus-3 scenario", whereby 3 lanes will be constructed (or opened) in Phase I and the other three in Phase II. By making the necessary adjustments to the same procedure conducted in section 6.4.1 and 6.4.2, the revised values computed are summarized in Table 6.9 for all four possible execution strategies: (1) 607.29 (5) NPV (Phase II) 69.13 (2) 126.67 (6 (3) 133.84 (7) NPV (Phase II) 106.65 (4) 199.77 (8 Table 6.9 demonstrates that when the construction of the bridge is divided into two phases, the value derived from flexibility is greater than the strategy of opening only selected lanes. Once the bridge is built as a whole, the option value would be quite small despite savings of O&M expenses in Phase II.…”

Section: Assessment Of Four Possible Execution Strategiesmentioning

confidence: 99%

Application of real option in risk evaluation and management of PPP/PFI projects

Liu¹

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Public-Private Partnership / Private Finance Initiative (PPP/PFI) has been a widely applied scheme to deliver large-scale infrastructure systems, industrial plants and other development projects, all of which form an essential pillar for global economic growth. The global movement away from heavy dependence on public sector financing, and toward greater reliance on private capital and control, means that the project finance mechanism will constitute an important tool to finance the large-scale infrastructure and industrial projects needed to support their economic development.A privately financed infrastructure project is inherently risky. Risk management in a project becomes a critical issue to both public sectors and private sectors. Risks mean losses to a project in the traditional risk management sense, and when the values of flexible measures to counteract such risks are overlooked, the value of a project may be understated. As an alternative approach, real option assumes that managers can take advantage of upsides and avoid obvious pitfalls during the development of a project. Such actions thus enhance the value of a project, and these are not captured in conventional evaluation methods such as Net Present Value. In this research, the primary objective is to study how real option can be applied to infrastructure projects with risks and uncertainties. The research aims to identify typical options in a project and evaluate them, design a new risk management framework incorporating the real option concept, which will lead to fairer risk allocation in a PPP/PFI setting.Based on the literature review, knowledge about risk management of PPP/PFI and real option theory is acquired. The case study method is used to achieve the research objectives based on the data collected. These case studies can be classified into short and major cases. The analyses of short cases identify embedded options in each -i -ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library project, based on which preliminary strategies incorporating the real option concept are designed. In the analysis of Major Case No. 1, the Dabhol Power Plant project in India, it is demonstrated that the real option evaluation methodology is more superior to the traditional NPV approach, and some of the flexible measures embedded in the case could contribute up to 26% of the base case NPV. Analysis of Major Case No. 2, the Malaysia-Singapore Second Crossing, includes an additional dimension, which is the sensitivity analysis of options subject to variations of input parameters. The case also illustrates the significance of creating options during design, construction and operation of a project. Based on the transaction structure and cash flows, Major Case No. 3 analyzes the options in a wastewater treatment plant project in southern China and proposes a new concept of "negotiation bands". Ultimately, the findings in this research lead to a new risk management framework that incorporates the real optio...

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Toward More Flexible Financial Agreements of PPP Toll Roads: International Experiences for Vietnam

Nguyen

2021

Lecture Notes in Civil Engineering

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Real option evaluation of complex infrastructure projects: The case of Dabhol Power

Cited by 7 publications

References 4 publications

A real option approach for the valuation of switching output flexibility in residential property investment

A real option approach for the valuation of switching output flexibility in residential property investment

Application of real option in risk evaluation and management of PPP/PFI projects

Toward More Flexible Financial Agreements of PPP Toll Roads: International Experiences for Vietnam

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