The West Moreton Health and Hospital Service were developing a business case for the expansion of the hospital to meet future demand. As part of the expansion, the HHS had the opportunity to purchase additional land on the same block as the expansion was proposed to occur. While the HHS did not have a firm plan for the additional land, they could see that the land allowed for a range of future options to be pursued.
To assist the HHS understand the value of these options, NineSquared undertook a real options analysis to understand the potential value of the land given a range of future, but uncertain, outcomes across different timeframes. The analysis considered several potential outcomes including a future scenario where the HHS decided to not build anything on the land (that is, not exercise the option). Each of the potential outcomes of purchasing the land were modelled using decision trees with probabilities and dollar values assigned to each of the possible outcomes across several different time periods to determine the expected value of each of the outcomes.
This analysis provided decision makers with the ability to understand the value of the strategic option to purchase the land at the present time, even though they may never exercise the option and use the land for hospital expansion. The real options analysis provided clarity about the timeframes within which a decision to exercise the option would need to be made and the size of the benefits relative to the cost of any project built on the proposed land.
