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A First Stochastic General Framework to Model the Project Finance Cash Flows under Monopolistic Situations

Gea Carrasco, Cayetano and Isla Couso, Lorenzo (2010): A First Stochastic General Framework to Model the Project Finance Cash Flows under Monopolistic Situations.

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Abstract

The main aim of this work is to model the cash flows and cost dynamics for a Project Finance. Large scale capital-intensive projects usually require substantial investments up front and only generate revenues to cover their costs in the long term.

The abandonment flexibility affects each project independently.

This is the only one that we consider in this study and it is quite different from the idea to abandon due to a common (specific) catastrophic event.

This option is exercised under those situations of expected costs to completion higher than the expected cash flow, that is, during the investment period in the development phase. Including this flexibility in project finance is the same as valuing a project with an implicit American put option.

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