Evaluation of flexibility in capital investments of infrastructure systems

Abstract

PurposeThe purpose of this paper is to present a methodology to evaluate the capital investments in infrastructure projects managed by private operators considering uncertainties in the operation and maintenance of the infrastructure components.Design/methodology/approachThe methodology described in this paper is based on two major sources of information: deterioration curves of the infrastructure systems obtained from Markov chain models and the value of flexibility obtained from a real options analysis.FindingsUsing this methodology, it is possible to determine whether there is value if project managers adopt flexible strategies in determining capital investments. These strategies refer to the opportunities of postponing, deferring or canceling capital investments required to maintain the operation of the infrastructure systems.Research limitations/implicationsThe model utilizes Monte Carlo simulation and real options analysis to overcome the complexities associated with the solution of the differential equations that represent the variability of the main factors in the project cash flow.Originality/valueThe methodology presented in this paper can be used by public officials, private investors, and asset managers to determine the value of flexibility associated with the strategies required to maintain the operation of infrastructure assets.