Added value of different approaches of real options in transportation infrastructure projects decision-making

Abstract

The importance of including flexibility into transportation infrastructure projects decision-making is widely recognised. Real-option analysis (ROA) is a technique for valuing flexibility to adapt to an uncertain future which can be included in the traditional Cost-Benefit Analysis. However, current practice of real options in transportation infrastructure decision-making is limited and therefore this research aims to investigate to what extent ROA can be a valuable addition. Based on the application of the Simplified Decision Tree Method and Binomial Option Pricing Method in two different case studies and on interviews conducted, it can be said that ROA is valuable as it can enrich the decision-making information for certain Dutch transportation infrastructure projects. Essentially, ROA leads to optimal decision-making, additional strategic insights and it supports adaptive decision-making. However, there are also practical limitations for the application of ROA in organizations such as the current standardized decision-making process, the additional time and effort and complexity of the application. Therefore, a trade-off between the added value and the additional effort has to be made. Further research into the methods and the effects of assumptions, applications on different types of infrastructure projects and dealing with projects influenced by many uncertainties is recommended.