Flexible Design of Airport System Using Real Options Analysis - MIT

12/14/2007
1.231 Planning and Design of Airport System Dai Ohama
stock price is evaluated, while in real options, the value of the project itself is evaluated.
Financial options are usually very short span such as two years, while the time span of real
options is very long-term.
3.2.2 Types of Real Options
There are several types of real options, such as deferral options, abandonment options,
expansion options, growth options, and compound options. [6] Applying appropriate type
of options enables managers to actively manage risks and uncertainties. For example, in
this case study, expansion options is appropriate to be applied. In the current design, which
is inflexible design, the whole facilities such as a runway, a parallel taxiway, and a south
edge would be constructed at the initial construction. On the other hand, in flexible design
that should be proposed in this study, only a runway would be constructed at the initial
construction and then sometime after 10 years of operation, if the demand of passengers
exceeds the capacity, a parallel taxiway and a south edge should be constructed; otherwise
they would not be constructed. Thus, if uncertain demand is unfavorable, it is not
necessary to exercise the option. It is possible to reduce upfront capital investment and
therefore reduce losses. The Flexibility to expand them takes advantage of demand that is
higher than expected in the deterministic projections.
Payoff
Expansion
No Expansion
Value of Project
Figure 3-3 Payoff of Expansion Option
3.3 Application of Real Options Analysis to Case Study
3.3.1 Which Method should be used for the Case Study
Term Project: Flexible Design of Airport System Page 10 of 22