The study on the real option decision-making model for investment value of water project

Abstract

Because of long investment cycle, large investment and many uncertainty factors, water project has the characters of irreversibility and postponability. So the investment value of water project is a dynamic one due to these uncertainties. The traditional investment value evaluation model ignores the impact of the above factors, thus can not evaluate the strategic value arising from the risk of water project. The real option of financial engineering can limit the loss with a definite price (the price of real option), while retaining the rights of getting the future development and investment opportunities, when the holder of real option is in the face of the future with many uncertainties. So the real option can effectively deal with the impact of uncertain factors in water project investment. The real option decision-making model for investment value of water project was established by using the large transfer water project as an example. The South-to- North Water Transfer Project is a very large water project, which is expected to solve the problem of water shortage in north of China. The model is used to evaluate the investment value of South-to-North Water Transfer Project in Hebei province. The result shows that the proposed model can provide decision support for the water project investment decision. © 2009 IEEE.