Title: Real options valuation of international railway construction projects: a case study

Authors: David Liu; Xiao Chen; Shufang Liao

Addresses: Department of Mathematical Sciences, Xi'an Jiaotong Liverpool University, 111 Ren Ai Road, Dushu Lake Higher Education Town, Suzhou, Jiangsu, 215123, China ' Department of Mathematical Sciences, Xi'an Jiaotong Liverpool University, 111 Ren Ai Road, Dushu Lake Higher Education Town, Suzhou, Jiangsu, 215123, China ' Department of Mathematical Sciences, Xi'an Jiaotong Liverpool University, 111 Ren Ai Road, Dushu Lake Higher Education Town, Suzhou, Jiangsu, 215123, China

Abstract: This paper aims to analyse an actual complex, real-life international railway construction project by using real option approach (ROA), namely, the Mecca Railway Construction Project conducted by the China Railway Construction Corporation Limited (CRCC) in 2009, in which the company had made a huge financial loss. This research tries to retrieve the company's decision process by calculating the net present value (NPV) of the project, and further evaluate the real options embedded in the project by using binomial tree method and Black-Scholes option pricing model. The employed methods help to have evaluated two types of real options in the project, i.e., option to abandon and option to defer. We have shown that the embedded options in the project contract could have reduced the company's financial loss by adopting flexible strategies in decision-making.

Keywords: real options; construction projects; binomial tree; case study; railways; railway industry; rail industry; rail transport; B-S model; Black-Scholes; China; Mecca Railway Construction Project; financial losses; decision making; net present value; NPV; abandonment; preferment; embedded options; project contracts; flexibility; risk management.

DOI: 10.1504/IJBCRM.2014.066157

International Journal of Business Continuity and Risk Management, 2014 Vol.5 No.3, pp.184 - 196

Received: 20 May 2014
Accepted: 11 Aug 2014
Published online: 12 Dec 2014 *

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