Evaluating flexibility in railroad construction projects

Abstract

This thesis aims to valuate flexibilities in a large-scale railroad construction project. In general, a railroad construction project involves a large amount of flexibilities due to its long construction period and conflicts among various participants. Therefore, railroad construction projects require investors to examine the feasibility of the project, taking into account managers' ability to make strategic decisions to deal with flexibilities during the construction. However. this important value is not considered in conventional valuation methods, such as Net Present Value (NPV) or Internal Rate of Return (IRR) analysis. This study introduces methods to identify and valuate the flexibilities involved in a project. Decision Tree Analysis (DTA) and Real Option Analysis (ROA) are mainly discussed as primary methods to avoid pitfalls of the conventional valuation methods. DTA helps managers to make future decisions in an effective way by providing graphical diagrams of decision opportunities. ROA appraises the value of mitigating risks by allowing managers to defer investing decisions until a situation that affects a project's success seriously becomes obvious. As a case study, the additional station construction projects in Incheon International Airport Railroad (IIAR) are analyzed to apply the methodologies to valuate the flexibilities. The case study shows that the use of DTA and ROA enables us to visualize the risks, and to quantify the value of flexibilities in the project.