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Uncertainty and flexibility in infrastructure investments: Application of real options analysis to the Ponta Delgada airport expansion

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  • Oliveira, A.
  • Couto, G.
  • Pimentel, P.

Abstract

Ponta Delgada airport is the most important air transport infrastructure in the Autonomous Region of the Azores. The increase in airport activity that resulted from the partial liberalization of the air transport sector has increased the pressure on its capacity. This study used Smit (2003) framework to evaluate the Ponta Delgada airport expansion, taking into consideration the future growth opportunities that come from an increase in tourism activity. Minor extensions were made to accommodate multistage investments. It was possible to capture the growth option value, since the decision to invest only occurs if add value to investor. The results show an option value higher than zero, whether the investment is deployed in one or two phases. Our paper aims to contribute to real options analysis field with an empirical application, allowing practitioners and business managers to better understand this framework.

Suggested Citation

  • Oliveira, A. & Couto, G. & Pimentel, P., 2021. "Uncertainty and flexibility in infrastructure investments: Application of real options analysis to the Ponta Delgada airport expansion," Research in Transportation Economics, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:retrec:v:90:y:2021:i:c:s0739885920300342
    DOI: 10.1016/j.retrec.2020.100845
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Real options; Airport expansion; Growth option; Flexibility; Uncertainty;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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