Analysis of real options in hydropower construction projects : a case study in China

This thesis investigates the application of real options to the design of major civil works. Specifically, it examines several methods to value the options, to determine which are more suitable in the design context. The thesis applies NPV, NPV with simulation, and binomial options pricing model to study a case on Yalongjiang River basin development. More specifically, a deferral option of Project A is studied. When doing the real options analysis, the thesis compares the usage of the NPV of project and the electricity price as the underlying and finds that the electricity price is a more appropriate underlying for the options analysis. On the pros side, the study confirms that options analysis overcomes the inadequacy of NPV analysis in uncertain environments, at least partly. Options analysis can evaluate the flexibility intrinsic or built into projects facing uncertain environments. Moreover, options analysis develops contingency strategy in uncertain environments. On the cons side, traditional options analysis requires the geometric Brownian motion assumption of the uncertainties and relatively high quality of data. The applicability of