Investing in Time-to-Build Projects With Uncertain Revenues and Costs: A Real Options Approach

Lauri Kauppinen, Afzal S. Siddiqui*, Ahti Salo

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review


Lagging public-sector investment in infrastructure and the deregulation of many industries mean that the private sector has to make decisions under multiple sources of uncertainty. We analyze such investment decisions by accounting for both multiple sources of uncertainty and the time-to-build aspect. The latter feature arises in the energy and transportation sectors, because investors can decide the rate at which the project is completed. Furthermore, two explicit sources of uncertainty represent the discounted cash inflows and outflows of the completed project. We use a finite-difference scheme to solve numerically the option value and the optimal investment threshold. Somewhat counter-intuitively, with a relatively long time to build, a reduction in the growth rate of the discounted operating cost may actually lower the investment threshold. This is contrary to the outcome when the stepwise aspect is ignored in a model with uncertain price and cost. Hence, research and development efforts to enhance emerging technologies may be more relevant for infrastructure projects with long lead times.

Original languageEnglish
Pages (from-to)448-459
Number of pages12
JournalIEEE Transactions on Engineering Management
Issue number3
Publication statusPublished - Aug 2018
MoE publication typeA1 Journal article-refereed


  • Investment lags
  • real options
  • technology management


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