Major projects optimal capacity and timing with time-to-build and investment cost dependency on capacity
by Skander Ben Abdallah; Alexandre Croutzet; Janosch Ortmann
International Journal of Applied Decision Sciences (IJADS), Vol. 13, No. 4, 2020

Abstract: This paper acknowledges the dependency of the project schedule, known also as the time-to-build, on the project capacity and proposes a real options model to determine the project optimal capacity, timing and value. In particular, we show that the dependency of the time-to-build on the capacity implies that the optimal capacity depends on the project time-to-build even in the waiting region. We also show that a greater sensitivity of the time-to-build to project capacity leads to a lower optimal capacity. Moreover, as the underperformance of major projects in terms of costs and schedule is frequent, we quantify the loss associated with the late completion of a major project. By doing so, we provide practitioners with a tool to evaluate the expected losses associated with project underperformance consistent with the reality of major projects.

Online publication date: Mon, 26-Oct-2020

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