Valuing Expansion Opportunities in BOT Highway Projects: A Branching and Folding Back (BFB) Method

Abstract

Public Private Partnerships (PPPs) around the world have become increasingly popular as an alternative way to finance infrastructure projects. Some of these projects also have growth opportunities and may be in a better position to be developed as a multi-staged project. Economic valuation methods such as discounted cash flow (DCF) ignore strategic values such as expansion options embedded in these projects, which result in undervalued project. Real options, commonly used with decision trees analysis (DTA), were introduced to address this problem of the DCF. However, The DTA assumes the time to make a decision is predetermined. This assumption is invalid when the decisions can be made any time within a project life. This paper presents a flexible point decision tree analysis (FP-DTA) and the Branching and Folding Back (BFB) method, upon which FP-DTA, real options, and Monte Carlo simulation are based. This approach helps facilitate project economic evaluation under uncertainty.