Flexibility and Uncertainty in Infrastructure Investment Valuation

A roadmap for valuing bridge life cycle investments taking flexibility and uncertainty along

Master thesis (2018)

Authors

K.J.B. Harleman Civil Engineering & Geosciences

Contributors

H.E.M. Temmink (supervisor 1)
A.R.M. Wolfert (supervisor 2)
M. van den Boomen (supervisor 2)
M.T.J. Spaan (supervisor 2)
Faculty
Civil Engineering & Geosciences
Copyright: © 2018 Koen Harleman
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Published Date

08-03-2018

Language

English

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Faculty

Civil Engineering & Geosciences

Abstract

Internal and external uncertainties like structural integrity, load, demand, weather conditions and spatial planning have an impact on Infrastructure assets. Incorporating uncertainties and flexibility to decisions by means of more information becoming available, adds value to new investments, life time extended maintenance and replacements. The traditional way to evaluate such projects, the Life Cycle Cost Analysis (LCCA) based on traditional Net Present Value (NPV) techniques fails to incorporate flexibility, and hence ignores extra value from expected future information. Decision Tree Analysis (DTA) and Monte Carlo Analysis (MCA) can actually allow for valuing flexibility in investments.
If investments are subject to non-diversifiable uncertainties, investors should be compensated for associated risks by using time dependent risk adjusted discount rates for valuation practices. A discussion is taking place on difficulties that occur if this principle is applied to infrastructure investments. Conducted literature research shows that current techniques to correct for non-diversifiable cannot be applied directly to most engineering valuation problems.
A MCA on investment alternatives regarding to the replacement of a bridge in the municipality of Amsterdam demonstrates how expected investment values can be calculated taking along multiple uncertainties and flexibility. Although the value of flexibility is always equal or greater than zero, case study results show that incorporating uncertainty and flexibility in the analysis can also affect the NPV negatively.