We apply real options results to capital budgeting in the Water servica as a regulated sector. We present a simple model to evaluate the flexibility of aqueduct systems. Aqueduct systems are characterized by a high degree of technological and operational flexibility and require higher irreversible sunk costs than other water utilities infrastructures. Our aim is to show that managerial and technical flexibility might turn out to be economically relevant if the “Piano d’Ambito” gives the concessionaire the option to strategically decide when to invest. We also correct the option value to take into account the fact that the length of concession contracts is generally shorter than the infrastructure’s useful life.
IRREVERSIBLE INVESTMENTS IN THE ITALIAN WATER SERVICE SECTOR: A REAL OPTION ANALYSIS
D'ALPAOS, CHIARA;MORETTO, MICHELE
2005
Abstract
We apply real options results to capital budgeting in the Water servica as a regulated sector. We present a simple model to evaluate the flexibility of aqueduct systems. Aqueduct systems are characterized by a high degree of technological and operational flexibility and require higher irreversible sunk costs than other water utilities infrastructures. Our aim is to show that managerial and technical flexibility might turn out to be economically relevant if the “Piano d’Ambito” gives the concessionaire the option to strategically decide when to invest. We also correct the option value to take into account the fact that the length of concession contracts is generally shorter than the infrastructure’s useful life.
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