Evaluation of flexibility in capital investments of infrastructure systems
Engineering, Construction and Architectural Management
ISSN: 0969-9988
Article publication date: 1 May 2006
Abstract
Purpose
The purpose of this paper is to present a methodology to evaluate the capital investments in infrastructure projects managed by private operators considering uncertainties in the operation and maintenance of the infrastructure components.
Design/methodology/approach
The methodology described in this paper is based on two major sources of information: deterioration curves of the infrastructure systems obtained from Markov chain models and the value of flexibility obtained from a real options analysis.
Findings
Using this methodology, it is possible to determine whether there is value if project managers adopt flexible strategies in determining capital investments. These strategies refer to the opportunities of postponing, deferring or canceling capital investments required to maintain the operation of the infrastructure systems.
Research limitations/implications
The model utilizes Monte Carlo simulation and real options analysis to overcome the complexities associated with the solution of the differential equations that represent the variability of the main factors in the project cash flow.
Originality/value
The methodology presented in this paper can be used by public officials, private investors, and asset managers to determine the value of flexibility associated with the strategies required to maintain the operation of infrastructure assets.
Keywords
Citation
Arboleda, C.A. and Abraham, D.M. (2006), "Evaluation of flexibility in capital investments of infrastructure systems", Engineering, Construction and Architectural Management, Vol. 13 No. 3, pp. 254-274. https://doi.org/10.1108/09699980610669688
Publisher
:Emerald Group Publishing Limited
Copyright © 2006, Emerald Group Publishing Limited