Applying real options to port infrastructure expansion: the case of a Brazilian port

Pedro Godinho, João Souza and Pedro Torres
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Pedro Godinho: Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra
João Souza: Ph.D., Graduate Program in Applied Computing (PPCA).University of Brasília, Brazil
Pedro Torres: Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra

No 2021-09, CeBER Working Papers from Centre for Business and Economics Research (CeBER), University of Coimbra

Abstract: This case study applies Monte Carlo-based real options to analyse the expansion of a port. A stochastic model is defined for the Santarém port, in Brazil, and the optimal moment for expanding the terminal is determined. The application resorts to a common spreadsheet and a simulation add-in, allowing the quantification of both the value of expanding the terminal and the flexibility to determine when to expand. The results allow us to conclude that deterministic cash flow models, based on the expected value, may lead to important biases in projects with capacity constraints. We also conclude that the expansion option may have a high value, which is strongly determined by the initial conditions, and that the expansion thresholds (the values of demand that trigger the expansion) change significantly along the project.

JEL-codes: C63 G31 R42 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2021-09
New Economics Papers: this item is included in nep-cfn
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