Template-Type: ReDIF-Paper 1.0
Author-Name: Arthur Grimes
Author-X-Name-First: Arthur	
Author-X-Name-Last: Grimes
Author-Email: arthur.grimes@motu.org.nz
Author-Workplace-Name: Motu Economic and Public Policy Research
Title: Building Bridges: Treating a New Transport Link as a Real Option
Abstract:  A transportation investment that materially improves links between centres opens up previously unavailable options for new activities. Traditional cost-benefit analysis does not adequately take account of the value of this option; real options theory must be added to the analysis to evaluate the full benefits. This paper uses a specific example, Auckland’s Harbour Bridge, to motivate the importance of real options analysis. Using illustrative, multi-period models of the real options problem, it highlights how inclusion of real options factors may either increase or decrease the attractiveness of a proposed investment. The models identify situations in which it is optimal to invest even where a standard benefit-cost ratio is less than one.
Length: 23 pages
Creation-Date:  2011-12
File-URL: https://motu-www.motu.org.nz/wpapers/11_12.pdf
Number: 11_12
Classification-JEL: O18; H43
Keywords: Transport investment; real options; cost-benefit analysis
Handle: RePEc:mtu:wpaper:11_12