Real options valuation of international railway construction projects: a case study

David Liu, Xiao Chen and Shufang Liao

International Journal of Business Continuity and Risk Management, 2014, vol. 5, issue 3, 184-196

Abstract: This paper aims to analyse an actual complex, real-life international railway construction project by using real option approach (ROA), namely, the Mecca Railway Construction Project conducted by the China Railway Construction Corporation Limited (CRCC) in 2009, in which the company had made a huge financial loss. This research tries to retrieve the company's decision process by calculating the net present value (NPV) of the project, and further evaluate the real options embedded in the project by using binomial tree method and Black-Scholes option pricing model. The employed methods help to have evaluated two types of real options in the project, i.e., option to abandon and option to defer. We have shown that the embedded options in the project contract could have reduced the company's financial loss by adopting flexible strategies in decision-making.

Keywords: real options; construction projects; binomial tree; case study; railways; railway industry; rail industry; rail transport; B-S model; Black-Scholes; China; Mecca Railway Construction Project; financial losses; decision making; net present value; NPV; abandonment; preferment; embedded options; project contracts; flexibility; risk management. (search for similar items in EconPapers)
Date: 2014
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