Abstract
Infrastructure projects often involve multiple activities and interrelated decisions to switch between activities under uncertainty. This article provides a novel quantitative approach for evaluating such complex projects as a set of real options. In our framework, an infrastructure project is represented as a directed graph where the nodes correspond to economic activities in the project and the links denote options to switch between activities. We first show that evaluating a project in this framework is formulated as a variational inequality problem. It is then proved that the problem can be decomposed into solving a series of tractable complementarity problems in a successive manner. This graph-theoretic decomposition scheme enable us to develop an efficient numerical algorithm for solving the project evaluation problems with any graph structure.
