Study On PPP Project Investment Decision-making Based On Real Options

Since 2014,the Public-Private Partnership(PPP)has caught so much attention.At the same time,more and more scholars focus on the question: how to evaluate PPP projects.This paper analyses the defects of Net Present Value(NPV)which is used to evaluate PPP projects.Real option method is introduced to amend NPV.The NPV-RO model is developed to evaluate PPP projects.Because of the contradiction between NPV's assumption and PPP projects' characteristics,NPV is not a good method to evaluate the PPP project.While,NPV is a good method to evaluate a project's profitability.Real option is a new method to evaluate PPP projects.Real option can calculate the value of management flexibility.However,it can't be used to evaluate profitability of a PPP project.This paper analyses the feasibility of using RO theory to amend the NPV and states the principle and procedure where RO amends NPV.NPV-RO model is developed based on traditional NPV and real option.This paper also identifies the management flexibility in a PPP project,and analyses their impacts on the PPP project cash flow.Calculating the PPP project's NPV and value of management flexibility.Finally,the model of evaluating PPP projects' profitability is developed.This article provides an example to instruct the investors to apply this model to evaluate PPP project and make decisions.The result show the advantages of this model.