Research On Applying Real Option In Investment Evaluation Of Highway Project

In order to overcome the weakness of traditional investment evaluation methods in highway project, such the inability to estimate objectively the flexibility value of management and strategic value, this paper attempts to apply the Real Option Theory into investment evaluation of highway project. For the natural advantage of Real Option Theory in evaluating the value of investment opportunity and managing project uncertainty, the new evaluation method based on Real Option, is able to estimate the highway project value more accurately and can also improve the evaluation means of highway investment project.Firstly, the Real Option characteristics of highway project were analyzed according to the irreversibility, huge flexibility and uncertainty of highway project. After illustrating the Multiphase European Compounded Option characteristic in the first phase of project and the Finite American Option characteristic in the second phase, based on the popular construction model"Multiphase Construction", the real option evaluation method framework of highway project was built. Secondly, we deduced the value equation of project by analyzing the Uncertainty Random Process Model of highway project income. Then the European Compounded Option Formula and Finite American Option Formula were achieved by using Option Pricing Method (Contingent Debt Analysis). Finally, a quantitative model of highway project investment evaluation based on real option theory was built and demonstrated. Furthermore, this paper also designs the application flow and decision-making rules of the new evaluation model, and systematically explains application value, conditions and foreground of Real Option Theory in investment evaluation of highway project.