Real options valuation of international railway construction projects: a case study

Abstract

This paper aims to analyse an actual complex, real-life international railway construction project by using real option approach (ROA), namely, the Mecca Railway Construction Project conducted by the China Railway Construction Corporation Limited (CRCC) in 2009, in which the company had made a huge financial loss. This research tries to retrieve the company’s decision process by calculating the net present value (NPV) of the project, and further evaluate the real options embedded in the project by using binomial tree method and Black-Scholes option pricing model. The employed methods help to have evaluated two types of real options in the project, i.e., option to abandon and option to defer. We have shown that the embedded options in the project contract could have reduced the company’s financial loss by adopting flexible strategies in decision-making.