A real options-based investment-income valuation model for old community renewal projects in China

Abstract

PurposeTo propose a new investment-income valuation model by real options approach (ROA) for old community renewal (OCR) projects, which could help the government attract private capital's participation.Design/methodology/approachThe new model is proposed by identifying the types of options private capital has in the OCR project, selecting the option model most suitable for private capital investment decisions, improving the valuation model through the triangular fuzzy numbers to take into account the uncertainty and flexibility, and demonstrating the feasibility of the calculation model through an actual OCR project case.FindingsThe new model can valuate OCR projects more accurately based on considering uncertainty and flexibility, compared with conventional methods that often underestimate the value of OCR projects.Practical implicationsThe investment-income of OCR projects shall be re-valuated from the lens of real options, which could help reveal more real benefits beyond the capital growth of OCR projects, enable the government to attract private capital's investment in OCR, and alleviate government fiscal pressure.Originality/valueThe proposed OCR-oriented investment-income valuation model systematically analyzes the applicability of real option value (ROV) to OCR projects, innovatively integrates the ROV and the net present value (NPV) as expanded net present value (ENPV), and accurately evaluate real benefits in comparison with existing models. Furthermore, the newly proposed model holds the potential to be transferred to various social welfare projects as a tool to attract private capital's participation.