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A First Stochastic General Framework to Model the Project Finance Cash Flows under Monopolistic Situations

Author

Listed:
  • Gea Carrasco, Cayetano
  • Isla Couso, Lorenzo

Abstract

The main aim of this work is to model the cash flows and cost dynamics for a Project Finance. Large scale capital-intensive projects usually require substantial investments up front and only generate revenues to cover their costs in the long term. The abandonment flexibility affects each project independently. This is the only one that we consider in this study and it is quite different from the idea to abandon due to a common (specific) catastrophic event. This option is exercised under those situations of expected costs to completion higher than the expected cash flow, that is, during the investment period in the development phase. Including this flexibility in project finance is the same as valuing a project with an implicit American put option.

Suggested Citation

  • Gea Carrasco, Cayetano & Isla Couso, Lorenzo, 2010. "A First Stochastic General Framework to Model the Project Finance Cash Flows under Monopolistic Situations," MPRA Paper 27125, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27125
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    More about this item

    Keywords

    Project Finance; Cash Flows; Stochastic; Real Options;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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