To read the full version of this content please select one of the options below:

Evaluation of flexibility in capital investments of infrastructure systems

Carlos A. Arboleda (School of Civil Engineering, Purdue University, West Lafayette, Indiana, USA)
Dulcy M. Abraham (School of Civil Engineering, Purdue University, West Lafayette, Indiana, USA)

Engineering, Construction and Architectural Management

ISSN: 0969-9988

Article publication date: 1 May 2006

Downloads
1609

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