Economic Feasibility Study of the Road Project Using Real Options Analysis

강동진; Song Byung-Rok; Cheong-Hyun Rho

doi:10.15793/kspr.2012.72..003

The purpose of this study is to consider the way of applying the real options analysis to the economic feasibility study of the road project. It is said that the real options analysis can supplement the traditional NPV(net present value)'s weakness that can't consider the future's uncertainty. This study reviewed the definition of the real options firstly, and investigated the theories of option valuation models, risk-neutral approach, four-step option valuation process etc. And then three kinds of options(option to contract/abandon/defer) were applied to a road project that the pre-feasibility study had been undertaken on it, and the value of options were estimated. The results showed that NPV of the road project increased when the options were applied. And the value of options increased as the volatility of the underlying asset and the life of option increase. These results shows that the theories about real options can be realized well in the case of the feasibility study of the road projects. But the greatest limit of this study is that the value of time - instead of the traffic volume - was used to estimate the volatility of the underlying asset. This limit was caused by difficulty in the acquisition of the relevant transportation analysis software file. So in the future study, it is necessary to resolve this difficulty and to consider the traffic volume in estimating the volatility of the underlying asset.

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