This case study applies Monte Carlo-based real options to analyse the
expansion of a port. A stochastic model is defined for the Santarém port, in
Brazil, and the optimal moment for expanding the terminal is determined. The application
resorts to a common spreadsheet and a simulation add-in, allowing the
quantification of both the value of expanding the terminal and the flexibility
to determine when to expand. The results
allow us to conclude that deterministic cash flow models, based on the expected
value, may lead to important biases in projects with capacity constraints. We
also conclude that the expansion option may have a high value, which is
strongly determined by the initial conditions, and that the expansion
thresholds (the values of demand that trigger the expansion) change
significantly along the project.
