Korean Management Science Review (경영과학)

The Korean Operations Research and Management Science Society (한국경영과학회)
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An Evaluation of the Economic Value of Outsourcing of Water Supply Services Considering Uncertainty of Water Price

수도요금의 불확실성을 고려한 상수도 사업의 가치 평가

  • Jeong, In-Chan (Graduate School of Information Management Engineering, Korea University) ;
  • Kim, Jae-Hee (Division of Business Administration, Chonbuk National University) ;
  • Kim, Sheung-Kown (School of Industrial Management Engineering, Korea University)
  • 정인찬 (고려대학교 정보경영공학전문대학원) ;
  • 김재희 (전북대학교 경영학부) ;
  • 김승권 (고려대학교 산업경영공학부)
  • Received : 2014.06.05
  • Accepted : 2014.10.11
  • Published : 2014.11.30
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Abstract

It is essential to carry out an economic analysis on public water supply projects so that policy makers and water enterprises are aware of the actual value of the project. However, many popular approaches based on discounted cash flow analysis do not capture the uncertainties inherent in cash flow. In order to analyze the economic values of the water supply project of local governments, we utilize real option model, which considers uncertainty in future water price behavior and captures the value of real life flexibility. The real option model is designed to incorporate the option to expand and abandon, and it is applied to a local government case. Furthermore, we assess the project by exploring Luehrman's option space to accommodate the more efficient decision making. The results show that substantial amount of potential value is included in the public water supply service, and the overall value is greater than the value obtained from the discounted cash flow model.

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References

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