Infrastructure Project Investment Decision Timing Using a Real Options Analysis Framework with Rainbow Option

Abstract

The infrastructure construction industry has always been plagued with significant uncertainty. It is therefore crucial for decision makers (DMs) to ascertain suitable investment timing, and there is still a need for a paradigm to assist them. Real options analysis (ROA) is a project evaluation method that allows DMs to incorporate volatility into their analyses. This study uses ROA to create a decision framework to determine the optimal infrastructure investment decision timing. Two types of ROA, the traditional option and the rainbow option, are used in the analysis to examine the impacts of these methods on timing. The paper’s case study involves construction of a gas station in the Bangkok metropolitan region and takes the price of and demand for gas as the sources of uncertainty. The paper also carries out a loss value analysis. The results suggest that the DM should postpone the decision further when volatility increases due to a “wait-and-see” strategy. We introduce loss value to compensate for depreciation in the value of the project due to deferment. The results of the evaluation and the sensitivity analysis confirm that compared to nonconsideration of investment value, consideration can lead to an earlier optimal time for the investment.