Strategic decision analysis for transportation systems

Abstract

This thesis examines decision analysis methods of capital investment in transportation systems. The transportation system is a fundamental infrastructure, and requires strategic thinking in making decisions on its projects. The current valuation methods, however, do not reflect the strategic value of a project. We investigate how to make a strategic decision by comprehensively valuing a project in transportation systems. This study begins by analyzing the characteristics and risks of a railway project as an example of the transportation system, and comparing the current valuation methods based on this analysis. Current methods are useful in valuing a project when we can fairly predict its performance in the system. However, we have difficulty in valuing a project under uncertainty. Focusing on the present value of cash flows does not properly measure the significance of a strategic project, but real options value (ROV) is an effective tool to do it. We next examine the theoretical correctness of the real options as applied to a transportation project. The critical question is whether we can create a portfolio that replicates the payoffs of options even if we cannot trade the options in a market. We answer this question by proposing the complete market assumption in the real options. To this end, we analyze a case of a railway project with Binominal Model. ROV quantifies the strategic value of a project, and consequently improves the investment strategy. We show how it is critical to recognize options in a project and benefit from them to effectively develop transportation systems in a competitive market.