Applying Real Option Theory to a Belgian Port Expansion

Abstract

This thesis examines the application of a real options approach to evaluate a port infrastructure project involving the extension of the container terminal of the Port of Liege's multimodal platform. By employing a binomial lattice model, the study assesses the value of incorporating real options into project appraisal. It first outlines the inadequacies in traditional investment decision-making approaches like the discounted cash flow method, which fails to account for uncertainties and flexibility in project management. The real options approach (ROA) is proposed as a more adaptable and resilient strategy, especially in long-term infrastructure projects like ports, which face numerous uncertainties including technological, economic, and regulatory changes. The study specifically applies the ROA to analyse the investment in the expansion of the Trilogiport terminal at the Port of Liege in Belgium. By employing the binomial model for real options, the study aims to model uncertainties in the investment decision-making process, quantify the project's value using financial indicators, and propose strategies to handle uncertainty effectively. We find that without options, the project's Net Present Value (NPV) is negative, but considering the option to expand turns NPV positive, suggesting financial viability. Sensitivity analysis shows that the model is particularly sensitive to variations in the tariff per ton. Implementation barriers are noted, such as limited knowledge and organizational lock-in. Despite these challenges, the study advocates for adopting real option reasoning in investment decisions to enhance flexibility and project value.