International Conference on Applied Economics ICOAE 2008 217

Highway project management through real option

F. Cucchiella, I. DAdamo and M. Gastaldi

Department of Electric and Information Engineering, Faculty of Engineering, University of LAquila, Monteluco di Roio, 67040
LAquila, Italy, Email: federicacucchiella@ing.univaq.it, gastaldi@ing.univaq.it

Abstract
Many project management decisions involve analyzing the tradeoffs between a fixed and certain capital investment and an uncertain stream of future cash
flows. Discounted cash flow (DCF) analysis is the most common method for valuing projects in a company, but an increasing number of practitioners are
now using real options methodology to get a truer description of the value of a project. In fact the use of the real options methodology may be a way for
solve the problem; some projects indeed carry a positive value when the options value is taken into account.
In this paper the attention is focused on a highway project; a highway system development involves huge irreversible investments, and requires rigorous
modelling and analysis before that the implementation decision is made. This decision-making process is embedded with multiple uncertainties due to
changes in political, social, and environmental contexts. In this paper, we present a multistage stochastic model for decision making in highway
development, operation, expansion, and rehabilitation.

Key Words: real option, risk management, public investment

1. Introduction
The theory of the Real Options is become gradually an evaluation technique and a new way to manage the decisional and valuation
process related to choices on the public expense (Benaroch et al. 2006; Chen 2006; Cucchiella and Gastaldi 2006; Yang and Blyth 2007).
Initially this theory has been applied especially at the private sector, but, in the last years, also an extension to public investment can be
remarked (Han 2003; Cheah and Liu 2005; Bellamy and Sahut 2006).
The attention of this paper is focused around a public investment management, for this reason it is necessary to individualize an
approach useful for the judgment of the investments selection in public sector and, more specifically, an infrastructural investment will
be analyzed.
The paper has twofold objective:
to develop a Selective Infrastructural Analysis to gain some strategic suggestions;
to apply the Real Option Analysis or Extended Costs-Benefits Analysis to the infrastructural investment data to quantify
the economic convenience of the project.
After this introduction in section 2 the multicriteria analysis will be introduced. This tool is useful for define the strategic
convenience of a project and, based on multicriteria analysis, in section 3, the selective infrastructural analysis (that can be applied at the
infrastructural investment under analysis) is developed. This first tool allows to define only the strategic convenience of the investment,
nothing it is defined about the economic convenience. With this respect two methodologies are applied: the first one is based on the
traditional Cost Benefit Analysis (section 4) and the second is based on Real Option Analysis (section 5 and 6). Some concluding
remarks close the paper.

2. Multicriteria analysis
Multicriteria analysis is appeared in the 1960s as a decision-making tool. It is used to make a comparative assessment of alternative
projects or heterogeneous measures. With this technique, several criteria can be taken into account simultaneously in a complex situation.
The method is designed to help decision-makers to integrate different options, reflecting the opinions of the actors concerned, into a
prospective or retrospective framework. Participation of the decision-makers in the process is a central part of the approach. The results
are usually directed at providing operational advice or recommendations for future activities.
Multicriteria evaluation can allow to produce single synthetic conclusion at the end of the evaluation or, on the contrary, to produce
conclusions adapted to the preferences and priorities of several different partners. Multicriteria analysis is similar to the techniques
adopted in the field of organisational development or information systems management and also resembles to cost-benefit analysis. Its
purpose is to structure and combine the different assessments to be taken into account in decision-making, whereby decision-making is
made up of multiple choices and the treatment given to each of the choices influences the final decision. Multicriteria analysis is used to
highlight the reasoning and subjective convictions of the different stakeholders on each particular question. It is usually used to
synthesise the opinions expressed, in order to determine the priority structures, to analyse conflictual situations, or to formulate
recommendations or operational advice. The choice of evaluation criteria, their definition and their weighting constitute a useful
contribution to multicriteria analysis.
It is relatively easy to transfer criteria, scoring scales and weightings to the project selection system if this system is also organized
on the basis of scoring-weighting. If with respect at the measures evaluation, the projects selection is based on the same logic, the
chances of stimulating and funding projects which contribute effectively to the program priorities are increased. Multicriteria analysis
allows to compare several points of view, and therefore is particularly useful during the formulation of a judgment on complex problems.
The analysis can be used with contradictory judgment criteria (for example, comparing jobs with the environment) or when a choice
between the criteria is difficult.
In general, this technique is mainly used in ex ante evaluations of public projects and their variations (the layout of a highway, the
construction of a new infrastructure, etc.). Less commonly however, multicriteria analysis is also applied to the intermediate or ex post
evaluations of programs.
In the next section a new approach, based on multicriteria analysis, is presented; it can be useful for Public Administration to define
both strategic and social convenience of an infrastructural project.
218 International Conference on Applied Economics ICOAE 2008

3. Strategic evaluation: the selective infrastructural analysis

With the purpose to support the Public Administrator during the selection project phase, the aim of this section is develop a new
method, called Selective Infrastructural Analysis (ASI) that has a double objective: to concentrate the financial resources on the strategic
infrastructure and to delaine a framework based on transparent decisional phases.
According the ASI the interested organisms individualize a group of technicians and, inside this group, the valuers will be select with
the aim that every organism must be represented fixing restrictive clauses on the number of the criterions examined by the valuers.
The evaluations are developed as criterions, identified inside the areas of reference (that in this case are four) and can be presented in
more than one area.
The main steps involved in multicriteria analysis can be individualized into several phases described chronologically below.
Phase 1. Definition of the projects or actions to be judged.
This will involve an inventory of the planned or implemented actions, or the elements on which the comparative judgement will
be made.
Phase 2. Implementation of the work group.
For the analysis of the public investment related to the construction of a new infrastructural project, the proper group work is
composed by four actors: Civil Society, the Environment, the Enterprise and Specific Elements of the public work (that are: possible
interactions between more public corporations, presence of other alternative streets, economic impact and future opportunities).
Phase 3. Individualization of the criterions for every reference area.
Particular attention must be given to the definition of criteria, in order to be as exhaustive as possible and to define the question
properly. The criteria must reflect the preferences of the decision-makers or the different points of view, so as to summarise and put
together the several characteristic dimensions used to evaluate an action. Unlike the number of measures to be compared, which can be
very large, the number of criteria must not exceed a reasonable limit. A key issue in multicriteria analysis is the involvement or not of the
different actors in the definition of criteria and their weighting. If the evaluator is actively involved in the analysis, the credibility of the
results is undermined. Before continuing with the multicriteria analysis, the evaluation team must check whether the process will allow
for measures to be compared satisfactorily. The majority of these measures must have produced impacts related to the majority of criteria
(that is, the impact scoring matrix must not have too many neutral, absent or insignificant impacts).
Phase 4. Division of the weights among the various criterions.
Once the projects and criteria have been defined, a quantitative estimation or a qualitative description of the impact of each
project, in terms of these criteria, must be made. For this purpose, short statements describing the different levels of impact may be used
("impact descriptors").
Based on the judgement criteria and measures (or groups or parts of measures) to be evaluated, the evaluation team would
usually construct a multicriteria evaluation matrix.
Phase 5. Elaboration of the single evaluation.
This phase involves the impacts evaluation. If the compensation methods is used the process involves allocating scores, and a
simple analysis using a basic spreadsheet. For the outranking variant, the approach will differ according to the type of analysis. The
process could be based on quantitative data, or, undertaken more subjectively, by experts or the stakeholders of the evaluation
themselves. Really, the technique usually combines real and objective elements concerning impacts, with the points of view and
preferences of the main partners.
In collecting the views of the partners, the evaluation team usually uses individual interviews or focus group interviews
considering people whose points of view are considered most relevant for judging the programme measures.
Phase 6. Weights aggregation and elaboration of a conclusive document.
Usually a computer package is used to sort the actions in relation to each other. A single weighting system for criteria can be
deduced, or the evaluation team can decide to establish average weights, which have the effect of effacing different points of view among
the assessors. In the most common application of the method at this stage, the evaluation team has all the elements necessary to calculate
global weighted scores for the different measures. The results and impacts of each measure will be evaluated in relation to the same
criteria; all these evaluations will be presented in the form of scores in an impact scoring matrix; there is a weighting system which
expresses the average preferences of assessors for a particular criterion.
Phase 7. Individualization of strategic project.
In this last phase all the available information are analyzed and the final decision related to the strategic convenience to realize
or not realize the infrastructure can be taken.
To reach a shared and effective result the model is not-static, indeed, it is possible to integrate it without creating a not-homogeneity
problem, this means that it is respected the division of the weights in the areas of reference without prefer some projects. The selected
valuers will point out the viewpoints adopted in the selection of criterions and parameters and the relative weights; in the case of different
point of view they will proceed to majority excepted the cases in which there are objective data coming from organisms certified, that in
this case are used as benchmark. In some cases the evaluation of the criterions is defined by quantitative judgments, in other cases the
evaluation derives from qualitative judgments, that is, from the experiences; as a consequence, in this last case is better to have a greater
number of valuers to reduce the subjectivity. For every criterion the final vote will be the average of the votes given by the various
valuers.
The methodology of the Selective Infrastructural Analysis is flexible indeed it can be applied to other transport systems without
modify the logical process described until now (Figure 1) but changing only some criterions.
The project under analysis, related to the realization of a local infrastructural way, derives from the need of a specific zone, whereas
the infrastructures investments generally (refusals, energetic) are useful for the collectivity welfare.

4. Economic evaluation: costs benefits analysis

The ASI methodology described in the previous section gives at the management an indication related to the strategic opportunity to
proceed with the investment, nothing it is defined about the economic aspects. To define the economic convenience of this project the
Extended Cost-Benefits Analysis (CBA) is applied to the economic comparison with the neutral hypothesis of not intervention. The
extended CBA, based on the real option analysis, allows to quantify, not only the economic value of the project, but also the value
deriving from the volatility, and require the preliminary traditional CBA application.
International Conference
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F
Figure 1: Logiical steps of thee ASI methodoology

Phasse Definitiono
oftheprojectsoractionstobeju
udged
1

Phasse Installation
nofgroupworkccomposedbythe
eselectvalues
2

Phasse Individualizzationofthecriterionsforeveryreferencearea
3

Phasse Divisionoftheweightsamo
ongthevariousccriterions
4

Phasse Elaboration
nofthesingleevvaluations
5

Phasse Weightsagggregationandellaborationofaco
onclusivedocum
ment
6

Phasse Individualizzationofstrategiicproject
7

The projecct is related at the

t realization of a fast-flow road,
r an alternaative way to thee Local Road (S S.S.16) that doeesnt cross exissting
infrastructure.
The necessity of realize thhe project derivves from the needs:
t reorganize thhe traffic to incrrease the servicce levels and red
to duce the local number
n of acciddents;
t face the voluume of traffic, especially the heavy traffic, since,
to s in same time,
t the local road is frequenntly blocked duue to
t kind of trafffic;
this
t remove the relevant probleems that are produced to the tourist
to t activitiees (that are cenntral economic source for the area
u
under analysis)) where the actuual local road crross the urban area.
a
The real option analysis represents
r the extension
e of the CBA, the follo owing steps are required:
a. individualizatio
i on and quantifiication of the costs
c required by
b the project and a of the bennefits that can derive
d by the same
p
project;
b. definition
d of the project lifetim
me and of the diiscount rate;
c. specification
s annd quantificatioon of the variablles characterizinng the project;
d. quantification
q o the CBA valuues;
of
e. definition
d of the proper real opption types;
f. quantification
q o the extended net present vallue.
of
The first four
f points are analyzed in thhe following suub-section, the section 5 and 6 are finalizedd to the real option definition and
quantification..
4.1 The pro
oject charac
cteristics: co
osts and ben
nefits
The applicatioon of the extendded CBA requiires the individuualization of th he costs and bennefits related too the project. The
T phase relateed at
the benefits deefinition is certaainly the more difficult;
d the following benefitts have been inddividualized:
c
consumers of thhe new road cann try benefits frrom the project because the neew run is brieferr, faster and it crosses
c less dennsely
i
inhabited areas;
f the consum
for mers that stay onn the local roadd - due to the reeduction of the traffic after thee new infrastruccture realizationn - a
s
speed increase of travelling annd a general bettter use of the ex xisting road theere will be.
About the vehicular traffiic, it is divided in two main grroups: light tran nsport (minus thhan 3,5 tons) annd heavy transpo ort (higher thann 3,5
tons); after thee infrastructurall project realizaation, it will be forbidden the heavy
h vehicle trraffic on the acttual local road.
The invesstment cost reqquired for the realization
r of the
t new local road is aroundd 65 million E Euros; in the fo ollowing years the
maintenance costs
c are about 2%2 of realizatioon cost with a 0,2%
0 annual inccrease.
With respeect at the actuall road, the mainntenance costs are a the same alsso after the realiization of the new infrastructu ure.
The value related to both acoustic and attmospheric polllutions on road d are a function of the kilometrres travelled by the passengers and
of the kilomettres realized by the vehicles (ggoods flows). These T values symmbolize at the same time as ccost as benefits since the vehiccular
flow increase - as specified ahhead - in a roadd and decrease in i the other onee.
The savinggs related bothh to the travel duration
d and to the kilometres reduction can be new benefitts for the comm munity; indeed,, the
reduction of thhe travel time allows to increasse time availablle for the job an nd for the free time.
t
The abilityy of a worker to produce weallth, is defined equal e to the vallue added that this
t worker cann produce with his job (Florio and
Vignetti 2006;; Brzozowska 2007).
2
It is hypotthesized that alll the occupantss of the heavy vehicles
v are workers of goods transport sectoor services, while the occupantts of
the light vehiccles are constituuted by worker and not workerr in the same prroportion that arre verified on thhe national dataa collectivity. More M
specifically, thhe estimated value
v of the tim me-value for the t unemployed d people is caalculated takingg into account the value timee of
unemployed inn the Europeann Union countriies. According the Infrastructu ures Governmeent valuations itt is possible to suppose that thhere
are 1,3 occupaants inside eachh light vehicle and a one occupaant inside heavy y vehicle. The saved
s costs derrive from the smmaller consumpption
of fuel, lubricaating, refrigerannt, pneumatic, brakes,
b as well as the most greater general obsolescence of thhe mechanical parts.p
The residuual value of the infrastructural public work is equal to:
50% of the inittial value, and
a residual valuue of the exproppriations that it is i supposed to be
b equal at the that
t initial valuue (European Co ommission).
220 International Conference on Applied Economics ICOAE 2008

With respect to the social costs of the accidents (estimated as the human costs, the sanitary costs, the loss of the productive ability,
the material damages) they are defined starting by the Istat data related to the accidents where there are deaths and/or damages to person.
The qualitative improvements of the local way and the partial removal of the principal causes of accidents can determine a smaller
rates of accident and therefore this can be counted as a collectivity benefit. The necessity of effective and efficient mobility is required
not only by the tourism enterprises, but also by the production and commercial enterprises. Insofar the possible increase of local income
(due to the introduction of new activities) and the creation of new occupational opportunities are two benefits originating by the new
investment.
4.2 The project characteristics: project lifetime
For the estimation of the project lifetime, the number of years required for the project realization has been taken as benchmark.
According the Organization for Economic Co-operation and Development (OECD) 25 years are required for complete the infrastructure.
For the definition of a proper rate of discount it is possible to follow the suggestions deriving from the regional groups that work on
the valuation and verification of the public investments. According their advices a 5% rate can be used for this project.

4.3 The project variables

The quantification of several variables that describe the project is necessary for CBA and real option analysis applications. At first,
with respect at the actual road, the new infrastructural project allows a kilometres reduction equal at 15%. For the vehicular flow is taken
into account the value related at the Daily Medium Traffic (Dmt) equal to 11.000 unities and this value it is been also integrated with
some Origin-Destination surveys. Moreover, deriving from several factors (such as the residents' increase, the transfer area offices,
tourist attraction) a percentage annual increase of the Dmt is been introduced equal to 3%.
To determine the travelling time has been used the outflow functions pointed out by the National Research Council (C.N.R.): for the
actual road it is been possible to correct the data with the results obtained by several developed surveys, in different traffic conditions, on
the local road;
The rate of road accident has been calculated on the base of the surveys recorded by the police. From these data it is possible to
hypothesize an accidents and injured reduction equally respectively to 18% and 21%. Moreover, every 10 years the reduction of the
accident will decrease of 25% due to the increase of the vehicular flow.
The employment rate is estimated on the based of the 18 tourism activities just present in the area around the future infrastructure.
With respect to the rate of the sonorous pollution an increase of this rate it is scheduled for the light vehicles that will cross the actual
road, whereas, a decrease it is scheduled for both light and heavy vehicles that will prefer to cross the new road. The rate of the
atmospheric pollution is estimated separately without aggregate the several components:
1. the reduction of light and heavy vehicular flows on the pre-existing local road;
2. the increases of the light and heavy vehicular flows on the new road;
3. the increases of the light vehicular flow on the local road.
4.4 Projects Cost-Benefit Analysis
The quantification of the economic costs is obtained adopting some proper conversion factors that, applied to the financial cost, allow to
introduce the required corrections for taxes transfers or tax burdens. All the economic values are been capitalized to 2007 (with the rate
of growth of the regional GDP) and, where necessary, the growth related to the Italian job productivity is been used (OECD).
Hypothesizing that 2009 will be probably the year of the construction opening, the economic values have been corrected with the
estimated 2008 Italian GDP value (International Monetary Fund).
The initial investments costs of the project are the 55% of the total costs; the atmospheric pollution costs are mainly generated
(80%) from the heavy vehicular flow that will transit on the new road (Figure 2).
The savings deriving from the kilometric distance reduction and from the travelling time reduction (70%) are the most relevant
benefits produced by the project (Figure 3).
Figure 2: Economic costs division

Sonorouspollution 1%

Atmosphericpollution 19%

Mainteinanceinesercise 25%
Initialinvestment 55%

0% 10% 20% 30% 40% 50% 60%

The benefits produced by the duration travel reduction are determined by the light vehicles that will keep to travel on the actual road
(51%) but notable it is also the contribution of the heavy vehicles (36%) that will transit for the new road. Moreover, the kilometric costs
reduction is essentially due to the heavy vehicular component (86%) and the benefits of smaller sonorous pollution are due for a 94% to
the heavy vehicular component.
At this point it is possible to quantify the value of the indicators selected as useful for the project under analysis, more specifically:
the Net Present Value equal to 2.569.775 s;
the Internal Rate of Return equal to 5,43%.
Moreover, the project presents the following actual costs-benefits rates:
the costs benefits ratio is 1,03;
the net costs benefits ratio is 1,06.
International Conference on Applied Economics ICOAE 2008 221

Figure 3: Economic profit division

Atmosphericpollution 3%
Occupationlevel 3%
Cairaccidents 6%
Residualvalue 7%
Sonorouspollution 11%
Travelling time 34%
Kilometricdistance 36%

Since this results are connected at some subjective evaluation also a sensitivity analysis is necessary, modifying the temporal
horizon, the discount rate, the construction costs, the maintenance costs, the project lifetime, the travel duration, the vehicular flow, the
incident level, the tourism occupational development. Also with the new scenario, modifying in a pessimistic way the input data, there is
the economic feasibility of the project in 50% of the pessimistic sceneries.
Without a real option application the net present value is distributed according a normal distribution, according the cumulated
distribution there is a 68% of probability that NPV has a positive value (Figure 4).

Figure 4: Net Present value distribution

5. Definition of real option types

The uncertainty that characterize the project variables has a double effect:
positive, since the growth option allows to exploit an opportunity that otherwise it would be not available (connection with
a new Hospital, that will be realized in the next years);
negative for the defer compound option (missed or delayed benefit for the collectivity and impossibility to access the
growth option).
The benefits of the growth option are three:
1. the reduction of the several cost sources for the transport; this value is determined multiplying the value related at
the no realization of the new infrastructural way for the actual costs of transport sustained from the related hospital (Board
of Health). The level of no operability of the transport system is equal to 62,5%, value estimated considering both that the
new road is a substitutive road (and not alternative) and also the possibility of new alternatives for the connection at the
new hospital.
2. Reduction of travelling times for the hospital workers that is calculated as the product between the saved time and
the value of the leisure time of whom works in the sanitary system. The final value is, therefore, determined by the product
among the percentage of leisure time in comparison to the working time, the number of times that the way is daily driven
and the number of hours saved compared with to the number of working hours.
3. Reduction of the travelling times for the hospital visitors calculated as the product between the saved time and the
value of the people leisure time. The final value is, therefore, determined by the product among the added value of the time
of a non busy person, the number of daily travelling, the estimation of the vehicular flows (calculated as the product among
the day-bed available and the daily middle turns of visit) the reduction of the travelling hours, the occupants' number on
board of the vehicles, the rate of occupation of the day-bed in a Local Sanitary Structure and the reference scenario of 365
days. To both benefits connected at the reduction of the travelling times has been applied the factor of conversion of the
manpower and the capitalization factor of 2008 year. The estimated economic value, equal to 754.861,10 s, is an under
estimated value since it doesn't take into account that to reach the hospital some minutes before, can allow also to save
some human lives or however to reduce the gravity of the clinical picture of the patient.
The real option analysis is organized in two steps: the Underlying Stock Price Lattice estimation (that is defined using binomial model of
Cox-Rubinstein) and the Option Valuation Lattice that requires the previous selection of the proper algorithm and of the risk neutral
probability.
For the option of growth the underlying value is the gross value of the project in absence of strategic opportunity, that is the present value
(PV) of the project; the value of the strike (ICR) is the investment required to exercise the option (in this case equal zero, being this cost
already anticipated in the preliminary project) and the factor of growth (e) that it is equal to the relationship between the actual value of
the growth scenario and the actual value of the basic scenario.
The used algorithm of reference is max (PV; PV*e - ICR).
The underlying value of the defer option is the sum of the project present value and the value of growth option; the value of the strike
(IDIFF) is equal to the investment initial costs capitalized to the time n (where n is equal to the number of the periods of deferment). The
algorithm utilized for this option is max (0; PV - IDIFF).
222 International Conference on Applied Economics ICOAE 2008

For the both options the risk-free rate used is the same applied for the calculation of the net present value; the dividends are equal to zero
because the new road not require a toll payment.
The value of the growth option is 11.842.740,02 s, while that of defer compound option is 11.451.916,98 s.

6. Real option quantification

The extended Net Present Value, is given by the sum of the Net Present Value (equal to 2.569.775,76 s) and the value created through
the real option application. More specifically:
extended NPV = NPV defer option + growth option
2.960.598,79 = 2.569.775,76 - 11.451.916,98 + 11.842.740,02.
From the extended NPV expression is possible to verify that the two options (of defer and growth) have an opposite sign, respectively
negative and positive. More specifically the defer option has a negative sign since the renouncement to this option (that happens with the
project realization) constitutes a cost for the same project. This is rational with the traditional worry (express through the so-called risk
prize) that a more high volatility of cash flows acts as element of dissuasion in the adoption of the project. Vice versa, the other option of
growth constitutes a benefit that it is gained through the project implementation. The growth option is positively associated to the
volatility, since this last, from one hand can determine new risks, and from the other hand is also a source of positive opportunities.
From the gained result it is possible to conclude that the Real Option application allows to increase the economic value of the project for
a 15% (from 2.569.775,76 to 2.960.598,79). This new value is derived by the volatility value that the real option allows to quantify,
otherwise this value is ignored.
The basic scenario taken into account for this first estimation is composed from a 20% volatility level, from an expiration date of defer
option and growth respectively of 5 and 10 years.
A sensitive analysis allows to determine how sensitive a model is to changes in the value of the parameters of the model and to
changes in the structure of the model; for this reason the following scenarios are taken in examination (Table 1):
1. The volatility level, initially equal to 20% can decrease to 10% or increase to 30%;
2. the expiration date of the growth option, initially equal to 10 years can assume also the values of 3 and 7 years;
3. the expiration date of the defer option besides the original vale of 5 years is hypothesized equal to 3 and 7 years.

Table 1: Real option sensitivity analysis

Volatility 10% Volatility 20% Volatility 30%
Growth duration 7 10 13 7 10 13 7 10 13
3 5,94 9,26 12,19 3,54 7,47 11,20 1,28 5,32 9,16
Defer
5 2,68 5,10 7,28 -0,20 2,96 5,82 -3,10 0,21 3,20
duration
7 -1,03 0,52 1,88 -4,20 -1,82 0,16 -7,61 -5,04 -2,92

The temporal extension of the defer period has a negative effect on the extended net present value, while, the expansion of the growth
option temporal horizon has a positive correlation with the value of the option.
Generally, with respect at the base case (that is the more realistic one) in the new scenarios analyzed through the sensitivity analysis, we
have that:
1. when the parameters values are changed toward a more optimistic scenario, improved performances are achieved through the
option exercise;
2. when the parameters are settled toward more pessimistic scenarios, in an half of this scenarios there is however a positive value
of the extended net present value. Only in the other 50% cases of the pessimistic scenarios the option exercise is associated at a
negative extended net present value.

7. Conclusions
In this paper the strategic and economic convenience of an infrastructural project are presented. For this scope two different
evaluation methods are been used: the Selective Infrastructural Analysis that allows to define the strategic convenience of the project
and the real option analysis that allows to evaluate the economic convenience of the project.
Working around an infrastructural public project it is relevant to individualize an objective approach useful for the investment
evaluation, in this way the public choices contribute to develop a climate of trust and a greater citizens awareness; it is necessary to be
able to individualize the strategic works and therefore to reduce the possibility that the public financial resources are not correctly used.
The available quantitative methods, also if based on qualitative judgments, are useful to determine a priority ranking among all the
possible investments and they are also more efficient when there arent additional cost required for their application; the implementation
of the ASI method doesn't require the use of a specific software and the judgments that are given by the valuers havent an additional
cost, because they are collected during the working hours; it is a method simply to use that allows to judge the project from a strategic
point of view.
Defined the strategic opportunity to proceed with the investment, the economic aspects must be analyzed. With this respect the
economic opportunity of the investment can be evaluated trough the well-known decisional criterion based on Van and IRR, but, several
authors have demonstrated that in this way is not evaluated the value that is possible to gain from the volatility. When, as in the case
under analysis, an investment is implemented under uncertain conditions, the newest analysis based on the real option application is more
proper. The real option application, organized in more steps, suggests that the investment allows to gain an economic value grater than
the investment amount required for the investment implementation. The sensitivity analysis that closes the paper, gives an additional
support to the choice to proceed with the investment.

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International Conference on Applied Economics ICOAE 2008 223

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