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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

Note, that as a

Note, that as a convenience to the reader, the case studies were written to stand alone.The case study analysis procedure described here is parallel to that described for theBWB case study in Section 5.1.The quantitative analysis used for this research builds on prior real options analysis work.An emphasis in this dissertation that has not received much attention in the real optionsliterature is in the evaluation of “complex” real options in complex system. Aspreviously discussed in Chapter 3, “complex” real options in complex systems havetechnical, organizational and process characteristics that are interconnected with oneanother. This differs from “standard” real options, which are characterized as a singlerelatively simple change or addition to a system that creates flexibility. Also, “standard”real options in “standard” system do not take into account organizational and processissues associated with the flexibility. “Standard” real options analysis techniques, asdiscussed in Chapter 2, are not therefore not adequate for taking into account thecomplexities associated with the option and the system.To better analyze “complex” real options in complex systems, a new analysis procedurewas used to quantitatively evaluate flexibility, and applied to the BWB and ITS casestudies. In general, the analysis procedure developed for this research utilizes at its coremore sophisticated modeling techniques to better simulate the options and system ofinterest. For the ITS case study, a regional traffic demand model was built to bettercharacterize travel behaviors on individual facilities and on a regional scale. The moresophisticated modeling techniques used in this research were deemed necessary toadequately capture the full richness of the issues surrounding the analysis of “complex”real options in complex systems.As shown in Figure 8-3 and Figure 8-4, the quantitative evaluation process that was usedfor the ITS case study consisted of three main parts; generation of inputs, the traveldemand model, and the quantification of option value. An overview of the activities andpurpose of these three main parts are described below.Note, that as part of the LCF Framework, the quantitative evaluation of the flexibility isnot the only evaluation that needs to be conducted. Rather, a qualitative evaluation of the“complex” real options in complex systems is conducted to better understand thepractical challenges that exist. This qualitative analysis for the ITS case study isdescribed in the next chapter.InputsTraffic DemandModelOption AnalysisFigure 8-3 Overview of three steps in ITS case study quantitative analysis.302

Figure 8-4 Quantitative analysis process for ITS case study, using Transcad trafficdemand model as system model.• Inputs – The inputs for the ITS case study that are important to the modelingneed to be determined. These inputs can describe network characteristics (such asnumbers of lanes for facilities), traffic characteristics (such as modes and modesplit), and environmental characteristics (such as travel demand growth). A fewof these inputs whose uncertainty may affect systems decisions are thendetermined, such as uncertainty surrounds future travel demand growth. Aprobability distribution is then assigned to represent the uncertainty associatedwith these inputs. As shown in Figure 8-4, multiple inputs, each with a separateprobability distribution can be used.• Traffic Demand Model – A traffic demand model, using the Transcad traveldemand modeling software package, was created to allow facility and networklevel analysis of traffic flows and speeds. The traffic demand model allows abetter quantitative understanding of how different decisions relating to the ITSreal options being considered affect specific facilities or the entire regionaltransportation system. The model can be run multiple times using the probabilitydistributions generated from the above discussion on inputs to understand how thesystem reacts under the input uncertainty. The outputs of interest from the modelare flows and speeds on specific facilities under different input conditions.• Real Options Analysis – Results from the traffic demand model with the inputuncertainty are used to create probability distributions of the benefits associatedwith specific choices of ITS and traditional infrastructure. Benefits of interest forthis research are value of time savings and toll revenues. The choice of these twobenefit streams are discussed in more detail in 8.2.3.Comparing the probability distribution function averages for systems withflexibility and without flexibility yields the value of flexibility. For example, theNPV distribution for addressing congestion problems with non-flexible andflexible solutions are generated. A non-flexible solution could be buildingtraditional infrastructure capacity in year zero, while a flexible solution could bebuilding ITS managed lane capabilities that would delay construction of303

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    ACKNOWLEDGEMENTSThis dissertation i

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    students. I am sure I am missing pe

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    6.7 Enterprise and Institutional Ch

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    Table 8-8 Summary of existing mode

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    Figure 3-17 System management loop

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    Figure 5-13 Historical world annual

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    Figure 7-19 Decision path for ITS m

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    Figure 10-3 Summary of differences

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    1. A large commercial aircraft maki

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    made to the system are often not on

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    From the MIT Engineering Systems Di

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    enterprise, the enterprise itself m

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    system capable of coping with uncer

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    Ch. 2Ch. 3Ch. 4Ch. 7Ch. 5Ch. 8Ch. 6

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    applicability of the framework. Fin

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    Myers, S. (1977) Determinants of Ca

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    FindingsFigure 2-1 Research process

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    • Difficult to predict future beh

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    As is apparent in the literature, t

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    of these. Ideally, either with the

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    do not appear to be mutually exclus

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    The ability for a system to activel

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    price (the option price) for the fl

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    and the results can be easier to ex

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    For some real options this appears

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    there is value to waiting to see wh

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    2.5 REAL OPTION PROCESSESExisting p

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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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  • Page 257 and 258: 6.9 REFERENCESAirbus. (2007) Produc
  • Page 259 and 260: 7 FLEXIBILITY IN HOUSTON GROUNDTRAN
  • Page 261 and 262: Figure 7-2 Characteristics of case
  • Page 263 and 264: cases can be added to existing or n
  • Page 265 and 266: 7.2.2 STANDARD ITS TECHNOLOGIES AND
  • Page 267 and 268: • increased opportunities for pri
  • Page 269 and 270: for Inherently Low Emitting Vehicle
  • Page 271 and 272: Marker 2005). This type of cross fu
  • Page 273 and 274: Figure 7-4 Plastic pylon separated
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  • Page 283 and 284: Figure 7-13 Transit center location
  • Page 285 and 286: Figure 7-15 Houston’s managed lan
  • Page 287 and 288: as HOT or TOT lanes. This can be es
  • Page 289 and 290: BuildtraditionalinfrastructureDelay
  • Page 291 and 292: HOT / BRTlaneNon-flexibleTOT / BRTl
  • Page 293 and 294: BuildtraditionalinfrastructureDelay
  • Page 295 and 296: or improved safety functions could
  • Page 297 and 298: Haning, C. and W. McFarland. (1963)
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  • Page 301: attempt was made to completely repr
  • Page 305 and 306: 8.2.1.1 Travel Demand ModelingThe t
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  • Page 309 and 310: I-10 KatyFreewayI-610(innerloop)Bel
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  • Page 313 and 314: Beltway 8(secondary loop)I-610 (inn
  • Page 315 and 316: 8.2.2.5 Major Modeling AssumptionsD
  • Page 317 and 318: from a public agency that is intere
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  • Page 321 and 322: This is because of the low-cost of
  • Page 323 and 324: From the analysis above, with the d
  • Page 325 and 326: Figure 8-16 Addition of two general
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  • Page 329 and 330: Table 8-5 Benefit-Cost Ratios for K
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  • Page 333 and 334: Figure 8-20 NPV density function, w
  • Page 335 and 336: Table 8-6 Summary of flexibility to
  • Page 337 and 338: Figure 8-23 Comparison of ITS/delay
  • Page 339 and 340: vehicles would continue to gain fre
  • Page 341 and 342: Figure 8-24 Value of time savings f
  • Page 343 and 344: This illustrates the importance of
  • Page 345 and 346: Table 8-10 Summary of ITS case stud
  • Page 347 and 348: Similar to the above discussion of
  • Page 349 and 350: 9 CHALLENGES OF FLEXIBILITY IN HOUS
  • Page 351 and 352: 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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