Real options analysis of the Minami Alps forest road construction project: new valuation approach to social infrastructure project with sequential unit projects

This article illustrates how the real options approach to public project evaluation is executed with a large-scale forest road construction project in one of the national park regions in Japan as a case study. Paying due attention to the existence of specified beneficiaries who want to make sure the allocated cost burden is warranted by prospective tangible economic benefits realized by the project’s execution, framing the real options application to public projects is made possible with the use of market-priced risk value in similar public projects. The article analyzes ex ante project evaluation models under both the existing legal framework and a new legal framework that allows the option to abandon the project totally or partially and clarifies how positive net present values of the Minami Alps forest road construction project depend on the cost-effectiveness parameter values of environmental damage mitigation activities and the degree of uncertainty embedded in the planned project. The article also executes sensitivity analysis to illustrate how the optimal domain of cost-effectiveness parameter values are affected by other parameters, such as the investment cost of unit project; and summarizes its contribution to the field of public project evaluation.