Research On Investment Evaluation Of PPP Project With Switching Option

In recent years, along with rapid development of economic, infrastructure construction demand is also growing. PPP play an important role in infrastructure constructing, however, because it involves more participants, the investment is huge and long construction period, therefore, the evaluation of PPP projects must be more cautious. Usually, Traditional investment evaluation method ignores the uncertainty of the project; and its assumption does not match the actual investment. Real option not only make up for the shortcomings of traditional evaluation method, but also take account of uncertainties, so the decision-makers can choose investment strategies according to the changing environment. Switching option is a real option. Adding switching option to the PPP projects will tap the value of flexible exchange of assets; provide a reference to decision-makers, accurate assessment of the project value too.Analyzing the characteristics of PPP investment decision, this paper applies the switching option theory to evaluate PPP investment projects. It establishes the binary tree models to determine the value of the project's switching options for the PPP project investment. Major contents include:Firstly, considering the lack of traditional evaluation, real option is introduced, and switching option using for project investment is the key research; Secondly, PPP projects'option features are analyzed, the pricing model which appreciate the PPP projects are chosen from Margrabe model and binomial model, volatility is an important parameter, there is some correlation of volatility between the two assets in switching option method. Then, based on this study, we make the three-dimensional switching option evaluation model of binomial tree with a function of volatility between the alternative assets; Finally, one case of PPP projects is selected to check out the traditional evaluation method and switching option model above,and make analysis on the result of the two methods.The results of this paper prove the switching option considering the value of investment opportunities, it is advanced than traditional evaluation method in evaluating PPP projects; It is important to choose option pricing model which is suitable the project when using switching option, in addition, the relevance of volatility of underlying assets can affect switching option value. The conclusions also verify the pricing model of witching option has practical value.