IDEAS home Printed from https://ideas.repec.org/a/taf/conmgt/v37y2019i1p24-43.html
   My bibliography  Save this article

Untangling decision tree and real options analyses: a public infrastructure case study dealing with political decisions, structural integrity and price uncertainty

Author

Listed:
  • M. van den Boomen
  • M. T. J. Spaan
  • R. Schoenmaker
  • A. R. M. Wolfert

Abstract

Managerial flexibility in infrastructure investment and replacement decisions adds value. Real options analysis (ROA) captures this value under uncertain market prices. The concept of ROA is that future unfavourable payoffs can be deferred as soon as more information about market prices becomes available. The popularity of ROA is seen in a growing number of case studies on real assets. Despite its increasing popularity, ROA has not gained a foothold in public infrastructure decision making. One of the difficulties in the application of ROA is the required estimation of market variables. To avoid this, a simplified but not correct version of ROA is easily applied, referred to as a Decision Tree Approach (DTA) to ROA. Another difficulty is that infrastructure assets are subject to other types of uncertainties, defined here as asset uncertainties. This study investigates the value of managerial flexibility in a public infrastructure replacement decision. The uncertainty drivers are the strength of a bridge, political decisions regarding traffic flow and the price development of construction costs. Three valuation approaches are compared: DTA, ROA and the DT approach to ROA. Although it is complex, ROA certainly adds value in public infrastructure decision making when market price uncertainty is prevalent. However, in the absence of reasonable estimates of market variables, the DT approach to ROA is the best alternative. In the absence of market price uncertainties, ROA should be avoided DTA is to be preferred.

Suggested Citation

  • M. van den Boomen & M. T. J. Spaan & R. Schoenmaker & A. R. M. Wolfert, 2019. "Untangling decision tree and real options analyses: a public infrastructure case study dealing with political decisions, structural integrity and price uncertainty," Construction Management and Economics, Taylor & Francis Journals, vol. 37(1), pages 24-43, January.
  • Handle: RePEc:taf:conmgt:v:37:y:2019:i:1:p:24-43
    DOI: 10.1080/01446193.2018.1486510
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/01446193.2018.1486510
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/01446193.2018.1486510?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Villegas Flores, Noé & Cruz Salvador, Liliana Cristina & Parapinski dos Santos, Ana Carolina & Madero, Yelinca Saldeño, 2021. "A proposal to compare urban infrastructure using multi-criteria analysis," Land Use Policy, Elsevier, vol. 101(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:conmgt:v:37:y:2019:i:1:p:24-43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RCME20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.