Real option valuation for mumbai metro rail project: Evaluating financial flexibility for reliance infra

Abstract

The paper aims at evaluating the financial flexibility of Reliance-Infrastructure (RInfra) as an equity sponsor in line 2 of Mumbai Metro Rail. We perform a real options valuation of the project for line 2 running from Charkop to Mankhurd. Our methodology attempts to find an expanded NPV presenting an option for investing in construction of line 2 after line 1. The approach is based on the real options theory to evaluate the investment in the Mumbai Metro Project. The investment made by RInfra in the two lines of Mumbai Metro Rail has been corroborated as per our projections drawn for the next 15-20 years. On valuation, we get the net present value of cash-flows for line 1 as negative. However, the option value when calculated for line 2 is a large positive number making the project attractive. The paper also presents a detailed analysis on the flexibility that RInfra possesses to improve its returns.