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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

6.7 Enterprise and

6.7 Enterprise and Institutional Challenges Related to Flexibility ....................... 2486.8 Lessons Learned about “Complex” Real Options in Complex Systems: TheBWB Case Study ........................................................................................................ 2536.9 References....................................................................................................... 2577 Flexibility in Houston Ground Transportation System using ITS .......................... 2597.1 Regional Architecture Description ................................................................. 2627.2 ITS Technologies............................................................................................ 2647.3 Managed Lanes ............................................................................................... 2677.4 Regional Congestion Pricing .......................................................................... 2777.5 Flexibilty in ITS.............................................................................................. 2797.6 Current Situation in Houston , TX.................................................................. 2807.7 ITS as a Real Option in Houston .................................................................... 2857.8 References....................................................................................................... 2968 Value of Flexibility in Houston Ground Transportation System using IntelligentTransportation Systems (ITS) in Managed Lanes .......................................................... 2998.1 Case Study Analysis Process .......................................................................... 3018.2 Transportation Demand Modeling.................................................................. 3048.3 Results............................................................................................................. 3188.4 References....................................................................................................... 3489 Challenges of Flexibility in Houston Ground Transportation System using ITS... 3499.1 Transportation Planning Process: Rational vs Pragmatic ............................... 3509.2 Qualitative Analysis Process........................................................................... 3539.3 Stakeholder Inventory..................................................................................... 3659.4 Current Situation in Houston .......................................................................... 3749.5 Examples of Flexibility in the Houston Transportation System..................... 3809.6 Processes for Identifying, Designing and Evaluating Flexibility in Systems. 3879.7 Summary of Interviewee Views on Flexibility............................................... 3909.8 Enterprise and Institutional Challenges Related to Flexibility ....................... 3929.9 Lessons Learned about “Complex” Real Options in Complex Systems: The ITSCase Study .................................................................................................................. 4069.10 References....................................................................................................... 41510 Findings and Conclusions................................................................................... 41910.1 Summary of Research..................................................................................... 42010.2 Major Findings................................................................................................ 42210.3 Life-Cycle Flexibility Revisited ..................................................................... 44610.4 Research Questions and Conclusions ............................................................. 45010.5 Future Research .............................................................................................. 46210.6 Concluding Thoughts...................................................................................... 46410.7 References....................................................................................................... 46512

TABLE OF TABLESTable 2-1 Overview of mathematical methods used to solve for option pricing............. 55Table 2-2 Five parameters used in real option valuation techniques............................... 56Table 2-3 “Standard” and “Complex” financial and real options.................................... 66Table 2-4 “Standard” and “complex” real options and “standard” and “complex”systems.............................................................................................................................. 67Table 2-5 Summary of major points from literature review. .......................................... 70Table 3-1 Basic option archetypes (Copeland and Antikarov 2001)............................... 98Table 3-2 Summary of LCF Framework chapter........................................................... 122Table 5-1 Number of derivatives likely to be produced in market under differentcompeting business objectives........................................................................................ 199Table 5-2 Summary of results of options for offering a derivative and the timing ofderivative offerings. ........................................................................................................ 199Table 5-3 Summary of option values and consequences for two different decision rules.......................................................................................................................................... 210Table 5-4 Option values for two different decision rules for competing BWB 450’s, onecommon and the other optimized.................................................................................... 214Table 5-5 Summary of results for option to delay design.............................................. 214Table 5-6 Summary of main results for BWB case study quantitative analysis chapter.......................................................................................................................................... 218Table 6-1 Functional activities performed by interviewees for each case study. .......... 228Table 6-2 ITS case study organizations and roles of interviewees. ............................. 229Table 6-3 AI and BCA Product Offerings, matched by closest competing products. Datafrom (Airbus 2007, Boeing 2007)................................................................................... 240Table 6-4 Summary of flexibility examples found in current aircraft manufacturingenterprises ....................................................................................................................... 244Table 6-5 Summary of interview results for process for identifying, designing andevaluating flexibility....................................................................................................... 246Table 6-6 Summary of interviewee views on flexibility. .............................................. 248Table 6-7 Summary of lessons learned for BWB case study......................................... 256Table 7-1 Traditional set of ITS bundles and user services. Taken directly from FHWA[FHWA 1995]. ................................................................................................................ 265Table 7-2 Examples of ITS real options. ....................................................................... 279Table 8-1 GP lane characteristics. ................................................................................. 314Table 8-2 Inputs and Results for Existing Katy QuickRide. ......................................... 320Table 8-3 QuickRide analysis re-visited with discount rates and toll revenues. ........... 322Table 8-4 Summary of results for additional GP lane construction on Katy Freewaycorridor............................................................................................................................ 326Table 8-5 Benefit-Cost Ratios for Katy HOT lanes under flat and congestion pricingstrategies, using two different cost assumptions............................................................. 329Table 8-6 Summary of flexibility to delay or proceed with traditional infrastructurecapacity expansion.......................................................................................................... 335Table 8-7 Summary of results for ITS option to delay infrastructure expansion. ......... 33713

  • Page 7 and 8: ACKNOWLEDGEMENTSThis dissertation i
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  • Page 14 and 15: Table 8-8 Summary of existing mode
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  • Page 36 and 37: applicability of the framework. Fin
  • Page 38 and 39: Myers, S. (1977) Determinants of Ca
  • Page 40 and 41: FindingsFigure 2-1 Research process
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    option is then evaluated with a “

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    • Option to engage in exploration

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    elatively straight-forward and are

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    OptionComplexityReal option in syst

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    2.8 REFERENCESAllen, T. et. al. (20

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    Hayes, R. and D. Garvin. (1982) Man

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    Ross, A. (2006) Managing Unarticula

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    3 LIFE-CYCLE FLEXIBILITY (LCF) FRAM

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    3.1 OVERVIEW OF NEED FOR LIFE-CYCLE

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    Figure 3-3 Condensed version of the

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    level, the appropriate enterprise n

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    3.1.2.1 Conceiving an OptionThe abi

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    3.1.2.2 Design and Evaluation of Op

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    option holder can not exercise the

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    system’s underlying structure and

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    3.2.2 DECISION TO USE LCF FRAMEWORK

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    Figure 3-11 Integration of decision

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    ounded rationality is not an issue,

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    quantitative analysis chapters, Sec

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    meantime, the land now would have d

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    3.2.5 DESIGN STRATEGY FOR OPTION EX

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    anticipated that external political

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    Figure 3-16 illustrates how the str

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    3.2.6 MANAGING THE SYSTEMManaging t

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    System Management LoopFigure 3-17 S

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    System Management LoopSystemImpleme

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    Long-term Management Loop ofUnknown

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    Long-term Management Loop of Unknow

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    Enterprise Readiness is included as

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    Figure 3-23 Condensed LCF Framework

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    3.4 REFERENCESAllen, T. et. al. (20

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    4 FLEXIBILITY IN BLENDED WING BODY

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    4.1.1 THE EARLY YEARSAfter the firs

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    Figure 4-2 Sikorsky S-42 Flying Boa

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    The 1950’s saw aircraft shift fro

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    to the government for doing so, wou

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    Figure 4-7 European supersonic civi

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    While airlines compete on a variety

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    Figure 4-11 Comparison of several l

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    Figure 4-12 Foreign and domestic so

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    Figure 4-14 Drawings from Leonardo

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    shifting their body weight) to the

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    Figure 4-19 Semi-monocoque construc

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    With a bi-wing (or tri-wing) constr

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    Figure 4-24 Loads and lifts generat

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    Figure 4-25 747-8, showing both loc

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    Additional benefits of the BWB arch

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    4.4.1 BWB OPTION DECISION PATHSFor

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    lower costs, higher scales of econo

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    Miller, B. (2005) A Generalized Rea

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    5 VALUE OF FLEXIBILITY IN BLENDED W

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    This chapter is composed of three m

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    this research were deemed necessary

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    For clarity of discussion, a high l

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    model, a better understanding of co

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    An overview of each of these subsys

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    important and may make inroads into

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    Figure 5-9 Airline finances and pro

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    Figure 5-10 Airline profitability,

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    Product design is based on a trade-

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    The airframe manufacturer productio

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    $70Inflation Adjusted Crude OilPric

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    5.2.5 MODEL VALIDATIONThe system dy

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    Forecast data (all planes)Model dat

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    5.3.1 INHERENT BENEFITSBWB technica

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    minor differences between aircraft

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    The remainder of this section looks

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    derivative depends on corporate str

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    Table 5-1 Number of derivatives lik

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    LowFuelCosts35%30%HighFuelCostsProb

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    The results presented can be interp

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    Compared to the Boeing 787, the dev

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    than a European option, because of

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    In the opposite case where the BWB

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    Because of the consequences of exer

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    35%30%Probability25%20%15%10%5%0%$-

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    BWB does not seem to offer advantag

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    type plane, relative to conventiona

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    5.4 REFERENCESAirbus. (2006) Annual

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    6 CHALLENGES OF FLEXIBILITY IN BLEN

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    FindingsFigure 6-1 Case study analy

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    Figure 6-2 Characteristics of case

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    6.1.3 INTERVIEWEE SELECTIONAs the i

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    Table 6-2 ITS case study organizati

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    about flexibility, i.e. is it a goo

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    2. If flexibility is used, can you

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    case with BCA, which has embraced a

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    primarily through military and NASA

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    Figure 6-7 Delivery and market fore

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    to meet rising demand, the overall

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    Another option widespread in the ai

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    design, evaluate or manage flexibil

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    Interviewee views on flexibility ce

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    and evaluations are based around th

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    operating and maintenance costs by

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    when fuel costs increased substanti

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    options, such as cross-program deri

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    6.9 REFERENCESAirbus. (2007) Produc

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    7 FLEXIBILITY IN HOUSTON GROUNDTRAN

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    Figure 7-2 Characteristics of case

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    cases can be added to existing or n

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    7.2.2 STANDARD ITS TECHNOLOGIES AND

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    • increased opportunities for pri

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    for Inherently Low Emitting Vehicle

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    Marker 2005). This type of cross fu

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    Figure 7-4 Plastic pylon separated

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    ecause the network of sensors can t

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    operating conditions. Additional ro

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    DSRC based system would require a l

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    Houston has already deployed one of

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    Figure 7-13 Transit center location

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    Figure 7-15 Houston’s managed lan

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    as HOT or TOT lanes. This can be es

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    BuildtraditionalinfrastructureDelay

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    HOT / BRTlaneNon-flexibleTOT / BRTl

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    BuildtraditionalinfrastructureDelay

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    or improved safety functions could

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    Haning, C. and W. McFarland. (1963)

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    8 VALUE OF FLEXIBILITY IN HOUSTON G

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    attempt was made to completely repr

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    Figure 8-4 Quantitative analysis pr

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    8.2.1.1 Travel Demand ModelingThe t

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    ange of traffic analysis studies to

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    I-10 KatyFreewayI-610(innerloop)Bel

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    5 lanesFigure 8-10 Example of satel

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    Beltway 8(secondary loop)I-610 (inn

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    8.2.2.5 Major Modeling AssumptionsD

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    from a public agency that is intere

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    funding improvements that would pre

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    This is because of the low-cost of

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    From the analysis above, with the d

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    Figure 8-16 Addition of two general

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    capabilities are typically deployab

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    Table 8-5 Benefit-Cost Ratios for K

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    35%30%25%Probability20%15%10%5%0%$(

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    Figure 8-20 NPV density function, w

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    Table 8-6 Summary of flexibility to

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    Figure 8-23 Comparison of ITS/delay

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    vehicles would continue to gain fre

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    Figure 8-24 Value of time savings f

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    This illustrates the importance of

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    Table 8-10 Summary of ITS case stud

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    Similar to the above discussion of

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    9 CHALLENGES OF FLEXIBILITY IN HOUS

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    new challenges as well as increase

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    9.2 QUALITATIVE ANALYSIS PROCESSPre

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    The qualitative research methodolog

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    to be able to answer the research q

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    Table 9-1 Functional activities per

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    USDOT, Volpe Center, Officeof Syste

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    3. If flexibility is used, can you

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    • Increased data sources - The no

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    importance that Harris County plays

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    Figure 9-7 H-GAC area of responsibi

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    Figure 9-9 State level stakeholders

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    9.3.2.3 State Legislators and Gover

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    met with business interests before

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    The resulting plan forecasted more

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    Discussions with interviewees with

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    Currently, the cross section of the

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    Also of interest is another part of

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    y the Southern Pacific Railroad. In

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    9.6 PROCESSES FOR IDENTIFYING, DESI

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    The federal level interviewee conti

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    may not be tied to a physical proje

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    During the interview process, sever

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    Figure 9-15 Katy Freeway configurat

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    Monitor/ManageFigure 9-16 Summary o

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    company on a schedule to complete t

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    interviewees commented on the ongoi

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    facilities has created a lack of wi

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    eversible HOV lanes as a safety pre

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    the real option and the decision to

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    • Mechanism for creating pressure

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    9.9.2.2 Uncertainty as a Result of

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    option purchase price. This was bec

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    9.10 REFERENCESABC7. (2004) Chicago

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    Judd, D. and T. Swanstrom. (2004) C

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    10 FINDINGS AND CONCLUSIONSChapter

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    concerns the use of real options

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    Table 10-1 Summary of major researc

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    to a system. Rather, these options

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    future option exercise can prevent

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    Q1-2. The case studies provided a d

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    Currently, the Silver Line right-of

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    technical system as well as the soc

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    In the ITS case study, the transpor

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    system that the technical system is

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    option exercise unlikely (building

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    some future date. This type of wast

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    DesignPhaseEvaluationPhaseManagemen

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    ITS capabilities used to create the

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    technical and social components of

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    incorporated directly into the mode

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    As defined in Section 2.6, the diff

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    In the BWB case study, an enterpris

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    For “standard” real options it

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    “Standard” real options are des

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    From the research it was found that

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    d. Evaluating the option with quant

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    need for the system is, while simul

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    10.7 REFERENCESClemons, E. and B. G

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