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Applying real options to port infrastructure expansion: the case of a Brazilian port

Author

Listed:
  • Pedro Godinho

    (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)

  • João Souza

    (Ph.D., Graduate Program in Applied Computing (PPCA).University of Brasília, Brazil)

  • Pedro Torres

    (Centre for Business and Economics CeBER and Faculty of Economics, University of Coimbra)

Abstract

This case study applies Monte Carlo-based real options to analyse the expansion of a port. A stochastic model is defined for the Santarém port, in Brazil, and the optimal moment for expanding the terminal is determined. The application resorts to a common spreadsheet and a simulation add-in, allowing the quantification of both the value of expanding the terminal and the flexibility to determine when to expand. The results allow us to conclude that deterministic cash flow models, based on the expected value, may lead to important biases in projects with capacity constraints. We also conclude that the expansion option may have a high value, which is strongly determined by the initial conditions, and that the expansion thresholds (the values of demand that trigger the expansion) change significantly along the project.

Suggested Citation

  • Pedro Godinho & João Souza & Pedro Torres, 2021. "Applying real options to port infrastructure expansion: the case of a Brazilian port," CeBER Working Papers 2021-09, Centre for Business and Economics Research (CeBER), University of Coimbra.
    • Handle: RePEc:gmf:papers:2021-09
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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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