Article Contents
Article Contents

# Modelling and computation of optimal multiple investment timing in multi-stage capacity expansion infrastructure projects

• * Corresponding author: Jinghuan Li

This project was supported by the Scientific Research Plan of Tianjin Municipal Education Commission (2017SK076)

• So far, the optimal investment timing to maximize the total profit of multi-stage capacity expansion infrastructure projects is not clear. In the case of uncertain demands, the optimal multiple stopping time theory is adopted to model the optimal decision-making of investment timing for multi-stage expansion infrastructure projects in a finite time horizon. In this context, the first-stage of the project involves a dedicated asset investment for later expansion, and the capacity of the project at each stage is constrained, which makes the cash flow of the project exhibit the characteristic of bull call spread. The upwind finite difference method and multi-least squares Monte Carlo simulation are combined to solve the project value and determine the optimal exercise boundaries at all stages described by a sequence of demand thresholds. A multi-stage power plant project is taken as an example to validate the model. Through the example, the optimal investment strategies and the value of the multi-stage project are provided; the effects of the dedicated asset and capacity constraint are illustrated. This study novelly reveals the effect of the capacity constraints on the project value using the bull call spread theory.

Mathematics Subject Classification: Primary: 49J20, 65C05, 65M06.

 Citation:

• Figure 1.  The operation load of the $i$-th stage project

Figure 2.  The comparisons between multi-stage and single period investments

Figure 3.  The distribution of investment times from one million sample path

Figure 4.  The optimal exercise boundaries for the i-th investment

Figure 5.  The influences of the dedicated asset ratio

Figure 6.  The net revenue of the i-th stage project for different demand levels

Figure 7.  The impacts of the demand volatility on the project value

Table 1.  Default parameters used in the calculations

 Parameter Symbol Value Unit Investment period $T$ 10 Year Planned investment times $N$ 3 time Construction period $\nu$ 1.5 Year Refraction time $\delta$ 2 Year Capacity of i-th stage $m_{i}$ $6\times10^{4}$ MW$\cdot$h/year Unit price $p$ $5\times10^{-4}$ million CNY/MW$\cdot$h Unit operational cost $c$ $4\times10^{-5}$ million CNY/MW$\cdot$h Construction cost parameter $\lambda$ $1\times10^{-2}$ million CNY/MW$\cdot$h Construction cost parameter $\beta$ 0.9 Drift $\alpha$ 6% Volatility rate $\sigma$ 15% Discount rate $r$ 8% Dedicated asset ratio $\eta$ 0.1
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