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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

to operating the managed

to operating the managed lane as an HOV3+ without ITS capabilities, but that the ITSshould be deployed or operated in a manner to maximize these inherent benefits. In thecase of the managed lane with a static tolling structure, significant excess capacity is notbeing utilized on the managed lane facility. In that case, the ITS capabilities are present,and adding inherent value, but do not add as much value as when the managed lane isoperated with a congestion pricing scheme.The delay option with using ITS is also greater than the delay option by itself. This isbecause the use of ITS-enabled congestion pricing allows for delay of expensive capacityexpansion for an even longer period of time than what could have occurred withoutdeploying ITS. This creates value at the lower end of growth rates, as it allows moretime for alternative projects to be invested in.In this case, the relative benefit streams from the inherent value and from flexibility areboth substantial. In the case of inherent value, the ITS creates value around $80 million,while it creates about $30 million in value from flexibility. In this case, the inherentvalue is worth more, but the flexibility is a significant source of value. Withoutconsidering the ITS capabilities as a dual value design, if only a single benefit stream isconsidered, significant value is not accounted for.The value from flexibility in this analysis is dependant on the current traffic levels of thefacility and the decision rules that go into making the build decision. For this analysis,the Katy Freeway was used, where traffic levels make irregular traffic flows a consistentproblem after just a few years for baseline growth and even sooner for higher growthrates. When high growth is experienced, there is only so much that can be done with theremaining capacity on the HOT lane before traffic conditions are again irregular. Thedecision rule used here assumes that irregular traffic flow is to be avoided and that newcapacity construction begins when consistent irregular flow is experienced. However, thedecision rule could be changed so that it is based on economic conditions or maintaininga higher level of service, which would mean building additional capacity when averagetraffic speeds dropped past a certain point, which would result in construction at anearlier date.In the following section, the second option intended to provide flexibility is discussed.This option involves switching operating schemes on a managed lane. Additionaldiscussion on decision rules is also presented.8.3.2 OPTION TO SWITCH MANAGED LANE OPERATIONSThe option to switch the operating state of the managed lane was examined and presentedin this section. Two operating states were considered; allowing passenger cars access tothe managed lane and allowing trucks access to the managed lane. In both situations itwas assumed that transit vehicles would continue to have access to the managed lane.For the first state, all autos were assumed to be granted access to the lane. The tollstructure was also assumed to be an extension of that used today. Namely, 3+ passenger338

vehicles would continue to gain free access to the HOT lane, and two-passenger andsingle occupancy vehicles (SOV) would pay tolls based on the level of congestion andthe vehicle occupancy rate, with SOVs paying a higher toll than two person vehicles. Forthe second state, a truck only toll (TOT) lane was considered, also based on congestionpricing to maintain free flow conditions.A summary of the both operating states is presented below in Table 8-8.Table 8-8 Summary of existing mode share, passenger car equivalents for each modeshare and value of time.ModesModes Current Peak Flows (vehicles / hour )3 passenger autos 9002 passenger autos 14001 passenger autos 4500Trucks 1200Existing HOV LaneCapacity (minus transit vehicles)1400Passenger Car EquivalentsModesPassenger Car Equivalents3 passenger autos 12 passenger autos 1Trucks 2.5Value of TimeModesValue of time ($/hour)3 passenger autos $54 ($18 per person)2 passenger autos $36 ($18 per person)Trucks$100 (per truck)For the existing single, reversible HOV lane determining the relative value of operatingthe managed lane as either a HOT or TOT lane is relatively straightforward. This isbecause traffic conditions are currently already high enough under either operatingstrategy to more than use all the available capacity.Under a TOT operating strategy, there is room for only about 560 trucks. At a value oftime of $100, this yields time savings of $56,000 / hour. Under the HOT lane operatingstrategy, there is capacity for all 900 three passenger vehicles and 500 two passengervehicles, for a time savings value of 900 * $54 + 500 * $36 = $66,600 / hour. For thecurrent conditions and value of time, the lane is more valuable operating as a HOT lane.While the relative time savings per vehicle favor using the managed lane as a TOT lane,the relative size of the vehicles means more passenger vehicles can utilize the lane. As2.5 vehicles can utilize the lane for every one truck, it is likely that the number ofvehicles occupying the same space as a single truck would generate more time savings.339

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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

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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

  • 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 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
  • 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: Figure 8-23 Comparison of ITS/delay
  • 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
  • Page 367 and 368: importance that Harris County plays
  • Page 369 and 370: Figure 9-7 H-GAC area of responsibi
  • Page 371 and 372: Figure 9-9 State level stakeholders
  • Page 373 and 374: 9.3.2.3 State Legislators and Gover
  • Page 375 and 376: met with business interests before
  • Page 377 and 378: The resulting plan forecasted more
  • Page 379 and 380: Discussions with interviewees with
  • Page 381 and 382: Currently, the cross section of the
  • Page 383 and 384: Also of interest is another part of
  • Page 385 and 386: y the Southern Pacific Railroad. In
  • Page 387 and 388: 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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