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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

esearch), demand growth

esearch), demand growth rates help determine the urgency that either newcapacity or new operating strategies are needed. In general, lower demand growthrates make for a less compelling case for new capacity addition via new physicalinfrastructure expansion, given the high-costs of construction and the low levelsof travel demand growth for utilizing the capacity in the future.• Mode split – The relative mode split between autos and commercial trucks was ofinterest for determining the relative value between HOT and TOT managed lanestrategies. In general, low truck mode share, relative to autos, makes TOT lesscompelling, while higher truck mode share, relative to autos, makes TOT morecompelling.• Exercise decisions for new physical infrastructure – The decision rules forwhen new physical infrastructure should be build as opposed to deploying ITSmanaged lane solutions was examined. Three types of decision rules wereconsidered; build new capacity when net present value for the project is positive,build new capacity when Benefit-Cost Ratio for new capacity is higher than ITSsolutions, or build new capacity when congestion reaches a threshold level (i.e.irregular traffic flow conditions are experienced).• Operator stakeholder type – Two different system benefits were considered;increases in societal benefits from time savings and toll revenue collected. Therelative benefits generated from both vary depending on operating condition. Asdecisions for when to build physical infrastructure or when to change ITSmanaged lane operations are based on the anticipated returns, how to measurereturn is of interest. Each type of return, societal returns and pure monetaryreturns from tolls, could appeal to different stakeholders, where publicstakeholders are swayed by mandate to consider societal returns, and privatestakeholders may only be interested in monetary returns. The stakeholderoperating the system will therefore help determine the relative benefits ofimportance between physical infrastructure and ITS managed lane strategies.The two outputs of interest for this research were value of time savings and revenuegenerated from tolls. Many other benefits could be considered, such as: environmentalimprovements and reduced fuel usage from smoother traffic flows, decreased vehiclecosts resulting from lower congestion levels, decreased accident rates from lower trafficlevels, increased reliability of travel times, etc. Travel time savings was chosen overthese other possible metrics as the “majority of transportation improvements aredominated by travel time savings” (Burris and Sullivan 2006). Additionally, no data wasavailable from some of these other types of savings (such as environmental effects) andother benefits (such as those stemming from increased reliability) are still an openresearch topic on how to best quantify the benefits.Toll revenues were also considered. Tolls are not a benefit generated from the system;rather they are simply a transfer from one stakeholder to another. However, inclusion oftolls is important given enterprise architecture considerations. For example, privateenterprises running toll facilities see toll revenue as a benefits stream and may not be asinterested in societal benefits (unless the private tolling authority gathers shadow tolls316

from a public agency that is interested in societal benefits). Without considering tolls asa benefit stream, the difference in operating agency strategies can not fully be explored.8.2.4 MODEL VALIDATIONThe Transcad model was judged as valid in three ways. First, the structure of the modeland the data used for mode splits and OD matrices came from the Houston area MPO,which uses the model as part of planning activities and decision making. As the networkand data originated with the MPO and are used professionally, the quality of the networkand data were deemed to be high.Second, the results that are generated from the Transcad model are what would beexpected. As shown in Figure 8-12 and Figure 8-13 the origins and destinations seem to,at least in general, match up with expected travel patterns, with AM trip origins coveringa large number of points (homes) and converging to a relatively fewer number of points(primarily places of work). Additionally, the traffic flow patterns follow expectedbehaviors, with the majority of travel taking place on highways, as shown in Figure 8-14.Finally, extensive consultations on building, calibrating and running the model were hadwith researchers at MIT who are experts in the field of using transportation models ingeneral and Transcad in particular 1 .1 Very special thanks to Mikel Murga at M.I.T. for the extensive help in building, calibrating and analyzingthe model. Any errors or omissions are the author’s alone.317

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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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    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

  • 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
  • Page 275 and 276: ecause the network of sensors can t
  • Page 277 and 278: operating conditions. Additional ro
  • Page 279 and 280: DSRC based system would require a l
  • Page 281 and 282: Houston has already deployed one of
  • 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)
  • Page 299 and 300: 8 VALUE OF FLEXIBILITY IN HOUSTON G
  • Page 301 and 302: attempt was made to completely repr
  • Page 303 and 304: Figure 8-4 Quantitative analysis pr
  • Page 305 and 306: 8.2.1.1 Travel Demand ModelingThe t
  • Page 307 and 308: ange of traffic analysis studies to
  • Page 309 and 310: I-10 KatyFreewayI-610(innerloop)Bel
  • Page 311 and 312: 5 lanesFigure 8-10 Example of satel
  • Page 313 and 314: Beltway 8(secondary loop)I-610 (inn
  • Page 315: 8.2.2.5 Major Modeling AssumptionsD
  • Page 319 and 320: funding improvements that would pre
  • 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
  • Page 327 and 328: capabilities are typically deployab
  • Page 329 and 330: Table 8-5 Benefit-Cost Ratios for K
  • Page 331 and 332: 35%30%25%Probability20%15%10%5%0%$(
  • 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
  • Page 353 and 354: 9.2 QUALITATIVE ANALYSIS PROCESSPre
  • Page 355 and 356: The qualitative research methodolog
  • Page 357 and 358: to be able to answer the research q
  • Page 359 and 360: Table 9-1 Functional activities per
  • Page 361 and 362: USDOT, Volpe Center, Officeof Syste
  • Page 363 and 364: 3. If flexibility is used, can you
  • Page 365 and 366: • 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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