Proceedings of 8th Annual London Business Research Conference
Imperial College, London, UK, 8 - 9 July, 2013, ISBN: 978-1-922069-28-3
Real Options Methods for Evaluating International Railway
Construction Projects
David Liu and Huang Yan
In this work we are concerned with assessing international railway
construction projects in real options approach (ROA). The case is the
railway construction project conducted by a Railway Construction Company
in 2009, in which the company had produced an enormous financial loss.
We used the mean-reverting model to evaluate the real option in the project,
and innovatively, we propose to adopt the present value of the project
normalized by both the length of the constructed railway and the
construction time as the underlying variable which follows a stochastic
mean-reverting process. This idea allows us to evaluate the real options
using Monte Carlo simulation. The paper provides the method and ideas for
contractors and project managers who would seek to minimize risks in
decision analysis.
Key words: Real options, Decision making, Mean-reverting process, Railway
construction
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Dr. David Liu and Mr. Huang Yan, Xi’an Jiaotong-Liverpool University, Suzhou 215123, P.R. China. Tel:
+86 (0) 512 8816 1610 Email：David.Liu@XJTLU.edu.cn