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 Table 4-3 Summary of Analysis Condition Initial Future Investment Expansion Perspective Simulation Option Design A R/W, PT/W & SE N/A Deterministic No No Design B R/W, Recognizing N/A PT/W & SE Uncertainty Yes No Design C R/W PT/W & SE Incorporating Flexibility Yes Yes Source: Applied R de Neufville, S. Scholtes, T. Wang [7] 4.5 Result of Analysis Table 4-4, 4-5, 4-6 shows the cash flow pro forma for three cases. Table 4-4 shows the cash flow pro forma and calculating the NPV of the project assuming the demand of the number of passengers grows as projected. (Case A) In this case, the expected NPV (ENPV) of the project is ¥678.8 billion. However, this value is not realistic since the actual demand of the number of passengers can change from this deterministic value. Table 4-5 shows the cash flow pro forma and calculating the NPV of the project recognizing uncertainty. (Case B) In this case, Monte Calro Simulation is conducted and it produces 2,000 possible demand scenarios. The ENPV of this case is ¥638.3 billion. But this ENPV is just one of the 2,000 scenarios. This simulation can generate 2,000 ENPV in each scenario, and can also generate distribution for each scenario. The actual ENPV is distributed as shown in Figure 4-5. The average of ENPV is ¥569.3 billion, which is less than that of the Case A. Although this design assumes that there are equal chances that demand changes to higher and to lower, this design limits the higher value of the project since the capacity is fixed, while there are still lower chances to generate losses. [7] Table 4-6 shows the cash flow pro forma and calculating the NPV of the project recognizing uncertainty and holding the option to expand. (Case C) This case also recognizes uncertainty and Monte Calro Simulation is conducted, which produces the ENPV of ¥686.7 billion. But this ENPV is also just one of the 2,000 scenarios. In this design, the actual ENPV is distributed as shown in Figure 4-5, and the average of ENPV is ¥621.6 billion, which is higher than that of Case B. Because the option to expand is exercised when the demand is higher than the current capacity, the ENPV is improved higher. The Term Project: Flexible Design of Airport System Page 18 of 22
12/14/2007 1.231 Planning and Design of Airport System Dai Ohama estimated value of the option exercised in order to incorporate the flexibility into design can be calculated by the difference between the ENPV of Case C and that of Case B, which is ¥52.3 billion. Table 4-7 shows the summary of this analysis. Case C, which holds flexibility in design has advantages over Case B in every aspect. Table 4-6 shows the summary of the analysis. [7] The initial investment in Case C is less than that of Case B, which means that the flexibility can reduce the initial investment. The ENPV, the maximum and minimum NPV in Case C is higher than that of Case B, so the flexibility can enhance the overall value of the project. Probability 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Cumulative distribution function Case B Average ENPV(B) ¥569.3 B 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 Target value \ million Case C Case A (¥678.7 B) Option Value ¥52.3 B Average ENPV(C) ¥621.6 B Figure 4-5 Cumulative Distribution Function (Value at Risk) Table 4-7 Summary of the Analysis Case B (No Flexibility) Case C (with Flexibility) Initial Investment (¥ in billion) 570.0 505.0 ENPV (¥ in billion) 569.3 621.6 Minimum NPV (¥ in billion) 339.3 338.1 Maximum NPV (¥ in billion) 773.4 899.1 Term Project: Flexible Design of Airport System Page 19 of 22
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