Flexible Design of Airport System Using Real Options Analysis - MIT

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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
12/14/2007 1.231 Planning and Design of Airport System Dai Ohama As introduced in section 3.1, there are three types of evaluation method in financial options, and these are also applied to real options analysis. Black-Scholes option pricing model and Binomial Lattice Model are widely used in financial options, but because they are very complex and needs financial skills, they are not so widely used in real options in engineering practice as in financial field. [7] Even if those methods are used appropriately, it is very difficult to explain to those managers who are not familiar with financial skills. [7] On the other hand, Monte Calro Simulation can be used more easily by using spread sheet than those two methods. Compared to conventional methods using financial mathematics, real options analysis using Monte Calro Simulation has advantages such as user friendly procedure, being based on data availability in practice, and being easy to explain graphically. [7] Thus real options analysis based on Monte Calro Simulation can be the appropriate as a tool for the valuation method for this case study. 3.3.2 Real Options Analysis Using Monte Calro Simulation In this case study, real options analysis using Monte Calro Simulation method is used and its procedure is: 1) to estimate cash flows pro forma including capital investment, future costs and revenues of the project, and calculate the economic value of currently designed case, 2) to explore the effects of uncertainty by simulating possible scenarios, each of which leads to a various NPVs, and the collection of each scenario generate both an “expected net present value” (ENPV) and the distribution of possible outcomes for a project by demonstrating cumulative distribution functions, and 3) to explore ways to avoid the downside risk and take advantage of upside potential by exercising options. [7] 4. Analysis of Case - Tokyo Int’l Airport New Runway Extension Project 4.1 Analysis Condition In order to conduct real options analysis, it is necessary to set up analysis conditions such as cash flow pro forma including capital investment, revenue scheme, operating and maintenance costs. In this case study, three types of design should be considered. Case A refers to the Term Project: Flexible Design of Airport System Page 11 of 22
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Flexible Design of Airport System Using Real Options Analysis - MIT

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