Infrastructure Investments

System Dynamics Models 

for the Valuation of Real Options in Infrastructure Investments

This research contributes to the existing body of knowledge and benefits industry practitioners by identifying best practices that improve the project delivery selection process while enhancing risk mitigation efforts.

The procurement selection process uses multiple-criteria decision-making and financial risk analysis to select the most economically sustainable delivery method given each project’s unique characteristics. The selection of the procurement process is based on best value where financial risks to the concerned government and other project stakeholders are mitigated through project finance structures, which are both dynamic and provide for real options. This research also presents an SD Model for the valuation of the types of real options within a design-build-finance-operate project delivery method (also known as a public-private partnership or P3).

This research also considers the complexity of infrastructure procurement as individual assets are increasingly viewed as being part of a larger network of interdependent systems. In response, the objective of this research is to present a methodology to simulate the behavior of assets that span across different types of infrastructure systems.

 

A second SD model captures the causal relationships between competing assets where simulation results elucidate the compounding effects of multiple investments that traverse across two or more infrastructure systems. By doing so, this research contributes to the existing body of knowledge and demonstrates how SD models are effectively used to value real options that are termed exotic. These exotic types of real options occur within a portfolio of competing infrastructure assets where the valuation of each real option must consider the compounding effects of competing alternatives as well as the value of the underlying asset. This research presents a methodology for the valuation of multiple types of exotic options in real investments that traverse across various types of infrastructure systems. This method can also be applied to the valuation of other types of exotic options in various industries including research and development pursuits.

Cash Flows & NPV
Financing
Abandonment Option
Project NPV With MRG or AO
MRG & Compound Option
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Team
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Gregory Fitch
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