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Building Bridges: Treating a New Transport Link as a Real Option

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  • Grimes, Arthur

    () (Motu Economic and Public Policy Research)

Abstract

A transportation investment that materially improves links between centres opens up previously unavailable options for new activities. Traditional cost-benefit analysis does not adequately take account of the value of this option; real options theory must be added to the analysis to evaluate the full benefits. This paper uses a specific example, Auckland’s Harbour Bridge, to motivate the importance of real options analysis. Using illustrative, multi-period models of the real options problem, it highlights how inclusion of real options factors may either increase or decrease the attractiveness of a proposed investment. The models identify situations in which it is optimal to invest even where a standard benefit-cost ratio is less than one.

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File URL: http://motu-www.motu.org.nz/wpapers/11_12.pdf
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Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 11_12.

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Length: 23 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:mtu:wpaper:11_12

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Web page: http://www.motu.org.nz
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Keywords: Transport investment; real options; cost-benefit analysis;

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  1. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637, August.
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