VALUATION OF A MULTI-STAGE RAINWATER HARVESTING TANK CONSTRUCTION USING A REAL OPTION APPROACH

Under climate change and urbanization, rainwater harvesting (RWH) systems are emerging as an alternative source of water supply because of growing concern about water sustainability. RWH systems can satisfy the various watering needs and provide the environmental benefits of lessening the damages from flood, drought, and runoff. The economic success of a RWH system is vitally concerned with the determination of the design capacity of storage tank to be built in the system. The design capacity is determined by the factors of average annual rainfall, period of water scarcity, and water price during the whole life-cycles. Despite the high uncertainties inherent in these factors, the current engineering design of RWH system construction often assumes that storage tanks should be built all at once. This assumption implicitly ignores the managerial flexibility in responds to the future as new information comes out-the right to build storage tanks stage by stage depending on the evolution of demand. This study evaluates the value of a multistage storage tank construction using a real option approach. A case study involving a typical RWH system construction in Jeonju, the Republic of Korea is conducted. The managerial flexibility obtained from the real option perspective allows engineers to develop investment strategies to better cope with the issue of water sustainability.