An Approximate Solution for Perpetual American Option with Time to Build : The Value of Environmental Remediation Investment Projects

Most investors and real estate developers consider Brownfield projects risky and, to compensate for environmental risk, demand higher returns on the investment needed to cleanup a contaminated property. The risk perception is aggravated by the fact that remediation of a contaminated site takes time, during which, real estate market conditions may change significantly. To estimate the value of a redeveloped Brownfield property considering the environmental and market risks, both technical and market risks are integrated. A closed form solution derived for a perpetual American call option was modified to calculate the optimal sequential investment that accounts for the time required to undertake the investment. The proposed solution can be used to value a Brownfield property if the owner has the option to delay remediation indefinitely, while waiting for optimal conditions. The results of the proposed approximation are compared to the results obtained using numerical techniques to solve partial differential equations