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# "Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

## Figure 8-18 Probability

Figure 8-18 Probability distribution for expected NPV associated with new traditionalinfrastructure construction.As seen in Figure 8-18, under most conditions, building additional GP lane capacitymakes economic sense, as the NPV is greater than zero. However, under conditions ofslower growth, the case for construction of additional capacity in year zero can not bejustified. The option to delay infrastructure investments until they are needed, which forslow growth may be many years in the future, would seem to have value compared withthe always build in year zero solution.Note that in this case study five points were sampled from the input function, yielding afive point sample for the output distribution. Technically, the data originally presented inFigure 8-18 should instead be presented as a discrete probability distribution, as shown inFigure 8-19Figure 5-23. However, as this becomes difficult to differentiate the differentsets of data, the data will continue to be presented with a curve-fit, as done in Figure8-18, for presentation purposes. This should not be taken to mean that the data representsa continuous probability distribution, as the probability values would change.330

35%30%25%Probability20%15%10%5%0%\$(200) \$- \$200 \$400 \$600 \$800 \$1,000 \$1,200NPV (in millions)Figure 8-19 Probability distribution for expected NPV associated with new traditionalinfrastructure construction, shown discreetly. This chart re-presents the data originallydisplayed in Figure 8-18, but as a discrete, rather than continuous, probability distribution.Figure 8-20 shows the shift in NPV if the option to delay is present. With the option todelay, it is assumed that the traditional infrastructure is not built until irregular trafficflows are experienced sometime in the future. It is then assumed that new capacity isadded immediately to the system, with no delay time.Additionally, it is assumed that the funds that would have been invested in the traditionalinfrastructure had it been build in year zero are re-invested in some other project if thecapacity expansion is delayed. Considering the entire state of Texas for a moment as thescope of the possible transportation system space of possible investments, re-investing inan alternative project makes sense, as TxDOT is only projected to have funds to cover35% of future investment needs (TTI 2002). This means that funds not spent on oneproject can be freed to spend on another project. Alternatively, even if there are noadditional projects to spend the funds on in the transportation system, the money raisedthrough taxes could instead be re-invested somewhere else or taxes could be lowered,allowing re-investment or consumption from the tax-base. In all cases, the delay ininfrastructure expansion allows some other opportunity to be pursued.In any of these alternative project cases, three different sets of alternative investments canbe envisioned. First, alternative investments could offer a similar NPV as that projectedfor the project to be delayed. In that case, the returns are constant across project in termsof the benefits that are expected for society as a whole and only differ in terms of whichsegments of society benefit. For example, delaying investments for facilities on the west331

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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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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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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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• Page 283 and 284: Figure 7-13 Transit center location
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• Page 301 and 302: attempt was made to completely repr
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• Page 315 and 316: 8.2.2.5 Major Modeling AssumptionsD
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• Page 337 and 338: Figure 8-23 Comparison of ITS/delay
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• Page 371 and 372: Figure 9-9 State level stakeholders
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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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