Project evaluation in the presence of multiple embedded real options: Evidence from the Taiwan High-Speed Rail Project

Trigeorgis [(1991) 309] identifies the analysis of case study applications based on data from actual projects, as perhaps the single most important prerequisite for underpinning the future development of the real options literature. This paper partially fills the void, and makes the following contributions. First, we apply an accepted real options valuation methodology (log-transformed binomial numerical analysis) to the actual dataset which formed the basis for project evaluation of the Taiwan High-Speed Rail (THSR) Project. We believe this is among the first empirical analysis in the real options literature to use such comprehensive, actual project data. Second, we compare our results to a static cash-flow valuation benchmark. The benchmark is shown to underestimate the real value of the project. Moreover, the value placed by Taiwan High-Speed Rail Consortium (THSRC) management on the flexibility to adapt decisions in the light of future contingencies is not only significant, but appears necessary to justify the project's economic viability. Third, the analysis evaluates both individual real options and also considers their interaction. We corroborate previous theoretical results which maintain that interactions among real options generally make their individual values non-additive. © 2004 Elsevier Inc. All rights reserved.