Abstract: In rail transit PPP projects, governments usually use capital compensation and demand guarantees/restrictions to attract social capital. Capital compensation is one of the key parameters of the concession agreement of rail transit PPP project. It is necessary to make an in-depth study on the capital compensation decision by combining the compound option value of demand guarantee/limit. In this paper, the uncertainty of future demand was described by the combination of binary tree model and Monte Carlo simulation. The real option theory was then taken into account to treat demand guarantee/limit as a compound option constituted by a series of European call and put options. The value model of this compound option was then integrated into the capital compensation decision-making model to be used in calculation case analysis for obtaining the demand guarantee/limit value and the probability distribution of its occurrence count, as well as the risk distribution of the minimum capital compensation ratio under this value. The results show that demand guarantee/limit will most likely affect capital compensation decision making. Providing demand guarantee/limit can effectively reduce the instability of capital compensation and is more conducive to the government’s capital compensation decision making.