Time to build: A real options analysis of port capacity expansion investments under uncertainty

Balliauw, Matteo

doi:10.1016/j.retrec.2020.100929

Cited by 15 publications

(9 citation statements)

References 37 publications

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“…The rise of the RO methodology in other sectors highlights the great interest of this approach; therefore, the validity of this approach in the aquaculture sector will be contrasted. RO is suitable for sectors with high uncertainty [ 50 , 51 , 52 ]. RO considers management flexibility.…”

Section: Introductionmentioning

confidence: 99%

Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options

Pérez-Vas

Guillén

Enríquez-Díaz

2021

IJERPH

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Aquaculture is an increasingly relevant sector in the exploitation of natural resources; therefore, it is appropriate to propose various models that include the fundamental variables for its economic-financial valuation from a business point of view. The objective of this paper is to analyze different models for the valuation of investment projects in a company in the aquaculture sector in order to conclude whether there is a model that represents a better valuation. Therefore, in this study, four valuation models have been applied, three classical models (net present value, internal rate of return, and payback) and a more recent model, real options (RO) for a company producing and marketing seaweed in Galicia (region located in the northwest of Spain). The results obtained, RO (€5,527,144.04) and net present value (€5,479,659.19), conclude that the RO model estimates a higher added value by taking into account in its calculations the flexibility given by the expansion option. Future lines of research include the application of valuation models that have been applied to companies belonging to the same sector in order to compare whether the results found are similar.

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Section: Introductionmentioning

confidence: 99%

Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options

Pérez-Vas

Guillén

Enríquez-Díaz

2021

IJERPH

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“…These continuous-time continuous-state RO models allow to optimise complex port investment decision under uncertainty with respect to the decision variables that are considered, as an infinite number of possible investment strategies are considered. Balliauw (2020) for example considers the timing and size of the expansion as flexible decision variables that need to be optimised, modelling demand uncertainty using a geometric Brownian motion (GBM). His theoretical model shows the management of a single actor-port that, if demand starts to grow stronger, they are better off by delaying port expansion and investing in more capacity once they invest.…”

Section: Introductionmentioning

confidence: 99%

“…In order to illustrate the proposed tool, the specific model of Balliauw (2020) has been chosen, because the majority of port capacity investment decisions are expansion decisions (De Langen et al, 2018) and involve considerable time to build (Kauppila et al, 2016;Vanelslander, 2014). Moreover, ports can be owned privately or publicly, which has a specific impact on investments under uncertainty (Li & Cai, 2017).…”

Section: Introductionmentioning

confidence: 99%

“…Since it was not possible to find a complete dataset of an existing port expansion scenario in this study, a hypothetical port expansion project with realistic data, from the Hamburg -Le Havre port range, and assumptions has been considered. Although the model of Balliauw (2020) does not explicitly model port competition, it is still useful to gain insight into the unrestricted optimal investment decision of a single port and to illustrate the model implementation in practice. To take into account the competition of nearby ports, the insights and different strategies of Ishii et al (2013), who however did not take the endogenous timing decision into account, and Balliauw, Kort, & Zhang (2019) need to be considered afterwards.…”

Section: Introductionmentioning

confidence: 99%

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From theoretical real options models to pragmatic decision making: Required steps, opportunities and threats

Balliauw

2021

Research in Transportation Economics

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“…Oh and Yoon (2020) study how construction lags affect decisions around residential construction projects. Balliauw (2020) considers time-to-build in port capacity expansion investments. Jeon (2021a) studies a firm's investment, default, and financing decisions in the presence of time-to-build, and Jeon (2021) studies timeto-build affects the decisions of investment timing and capacity in a duopoly market.…”

Section: Introductionmentioning

confidence: 99%

A framework for modelling cash flow lags

Armerin

Song

2021

SN Bus Econ

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Traditional models of irreversible investment problems assume that the investment starts generating cash flows immediately, i.e., at the same time as the investment is undertaken. Real-world investment situations are characterized by time-to-build or investment lags, which means that there is a time difference between when the investment is made and when the investment starts generating cash flows. We combine two existing models of investment lags to obtain a flexible, yet simple, way of modelling and analyzing the effects of investment lags. Both traditional models, and models that incorporate the effects of time-to-build, typically assume that the expected future cash flows generated by an investment are represented by a single cash flow that reflects the size of the market value of an investment. To reflect real-world cases where investments generate cash flows in several time periods, we present a framework in which cash flows are explicitly allowed to be spread out in time. Our model can be used to incorporate cases where an investment is partially sold in different time periods. Using an irreversible optimal investment timing problem case study, we show how our framework makes it possible to easily compare the effect of different cash flow timings. In this case, the value and the timing of the investment depend on a constant that in a natural way can be decomposed into three parts, thereby showing the influence of the value and timing from the respective parts of the framework.

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Time to build: A real options analysis of port capacity expansion investments under uncertainty

Cited by 15 publications

References 37 publications

Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options

Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options

From theoretical real options models to pragmatic decision making: Required steps, opportunities and threats

A framework for modelling cash flow lags

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