A Method Of Highway Projects Decision Making Based On The Monte Carlo Risk Simulation

As an important construction infrastructure, highways play a vital role of a country or aregion’s economic and social development. Highways have many features, such as theinvestment scale is huge, the life-cycle is long, phase more and exist many uncertainty factors,etc. Along with the increase of the prices, land requisition, project scale and the demand of theecological environmental protection engineering, the risk of highway investment increasedsignificantly. Therefore, it’s not appropriate to only focus on the methods of economicbenefits, how to trade off the relations between the benefits and risk is significant to carry outthe decision-making and choose the optimal investment alternative.Traditional method of highway investment decision-making usually use the discountedcash flow method, which is not considered the uncertainty of the project’s future cash flow.Therefore, this article introduces Monte Carlo risk analysis method and discount cash flowmethod to make risk analysis of our country. Compared with the sensitivity analysis method,Monte Carlo simulation method can use the historical data to fit the distribution of risk factors.According to the probability distribution curve and parameters, we can more intuitive to knowthe project’s benefit and risk.In the meantime, this paper proposes to use the method which combines the Monte Carlosimulation and genetic algorithm method to solve the highway portfolio decision makingproblem. This method can solve the optimal portfolio solution set under the targets ofmaximizing the mean of the total net present value and minimizing the variance of the totalnet present value. Then, we introduce the Markowitz’s mean-variance theory to maketrade-off analysis of the two solution sets and solve the Pareto solution set. Finally, accordingto the utility indifference curve of the decision makers, we can solve the optimal portfolioalternatives under different risk aversion degree of decision makers correspondingly.In the case study of six new highways of Zhejiang province, the research result showsthat compared with traditional method, Monte Carlo simulation method can improve theoption value caused by the uncertainty of the future cash flow. On the other hand, using the Monte Carlo simulation method to deal with the problem of highway portfolio decisionmaking, we can solve the pareto solution set based on the balance between the benefit and risk.At the same time, we can use this method to compare different schemes which has a goodapplication value. The method proposed in this paper provides some technical andmethodological support for risk management and decision making of the highway to someextent.