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600451-00075-1 Report Abstract

Simulation of Investment Returns of Toll Projects

Weiyuan Yuwen and Zhanmin Zhang, University of Texas at Austin, August 2013, 53 pp.

This research develops a methodological framework to illustrate key stages in applying the simulation of investment returns of toll projects, acting as an example process of helping agencies conduct numerical risk analysis by taking certain uncertainties associated with toll projects into consideration. The numerical financial model provides a deterministic financial evaluation for the project. Next, there are four risk sources identified in this research, including project-based risks, cost-based risks, toll-based risks and finance-based risks. For each risk source, critical variables are recognized and probability distributions are suggested. The deterministic financial evaluation result is obtained through the projected single-value estimates of these variables. By considering the variability associated with the components of a project, the Monte Carlo simulation technique is used to estimate the overall project risks. Risk simulation results are interpreted through various numerical measures of project’s risks, which further provide agencies with quantitative information to set investment decision criteria. For risk optimization, exploration of optimal value-combination of variables and utilization of single-variable control method are discussed, which could assist agencies in setting threshold toll prices in order to achieve the goal revenue and maximize potential returns on the investment. The risk analysis, consisting of risk simulation and risk optimization, can give the statistical distribution of investment returns for a project under analysis, providing decision makers with a direct approach to the evaluation of the projects’ financial risks and the development of recommendations for risk control measures.

Keywords:  Public Private Partnership, Risk Analysis, Financial Evaluation, Toll Projects

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