Research On Investment Decision Of Highway Project With Real Option Approach

At present, the highway project is rapidly developed in China, and it has played a significant role in the economy area. However, because of its huge investment, long life cycle and great uncertainties, the investor should be more cautious than ever in his highway project investment. Usually, traditional evaluation methods of highway project do not consider the uncertainty of the future cash flow of the project and the flexibility during the construction. On the contrary, the method of real option can not only better deal with the value anticipation of uncertainty and effectively overcome insufficiency of traditional evaluation method; but also decision makers can choose whether to continue, extend or cancel the project implementation according to different situations. In short, the highway investment evaluation model with the real option finds the value of the different options in the highway excavation of investment caused by uncertainty and dynamic changes, and provides a feasible and quantitative analysis tools for the investment opportunity, the assessment of the project with this model is close to the practical value.Considering construction stages of the highway investment, this paper applies the real options theory to evaluate highway investment projects. It uses the binary tree models to determine the value of the project's expansion options for the highway project investment. Major works after research include:Firstly, the conventional method of evaluation and its disadvantage is analyzed; Secondly, development situation of China highway is studied, and its option features is analyzed. Then, we make the model of investment decision and application ways. Based on this study, one example is selected to check out the model above and make analysis on the result of the model; finally, sensitivity analysis is used to stimulate the major parameters which affect the option value.It comes to a conclusion that the method of real option is superior to the method of traditional evaluation in highway project investment evaluation. Select the binary tree models and the volatility of these important parameters for the option value which suitable project characteristics, these are the groundwork for precise option value. Sensitivity analysis is used to stimulate the major parameters which affect the option value. It proves that under certain conditions, the option value of project can help to improve investment decision accuracy, and to give investors accurate and strategic investment evaluation method.