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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

north of Houston and the

north of Houston and the Sam Houston Toll Road running primarily in the east-westportion of Beltway 8 corridor (the secondary ring road around Houston). Debt financingis estimated to save years in the construction of a facility, as it avoids the need to paceconstruction under a pay as you go scheme (Sallee and Brewer 2002).Related to the debt financing portion of H.B. 3588 is the potential for TxDOT to convertgas tax roads or build new roads as tolled facilities. The potential to toll the facility cansecure a revenue stream that can then be used to secure the debt financing. As HCTRAhas shown, tolled facility revenue sources in Houston can be quite substantial.As part of the tolling ability granted in H.B. 3588, TxDOT has multiple new alternativesin managing the tolled facility. TxDOT can operate the facility itself, engage in apartnership, such as a public private partnership (PPP) or divest itself from the facility toa third party.H.B. 2702, passed two years after H.B. 3588 in the following legislative session (theTexas legislature only meets every other year), clarified and enhanced several perceivedshortcomings in H.B. 3588. For example, while H.B. 3588 granted TxDOT authority toengage in tolling, it did not grant it authority to engage in all activities needed to operatea tolled facility, such as enforcement. H.B. 2702 enhanced TxDOT authority to make it aviable tolling operator.Historically, TxDOT has been a very traditional state DOT. “Growing up” in theEisenhower era of Interstate construction, multiple interviewees characterized TxDOT asbeing an agency focused on construction, not operations. Indeed, one interviewee withlong standing experience with TxDOT continued by characterizing TxDOT as beingresistant to the idea of tolling in general and the subsequent demands it would place onoperations. Before H.B. 3588, TxDOT would often enter into agreements with localagencies regarding the use of its right-of-way, especially if they were not able to developthe right-of-way themselves. For example, the Sam Houston Toll Road was built and istolled by HCTRA entirely on TxDOT right-of-way, which was simply turned over toHCTRA.The era of simply turning over right-of-way to other agencies seems to be over with thepassage of H.B. 3588 / 2702. TxDOT has realized the potential value that it can nowdirectly exploit from the right-of-way and is determined to leverage that value to helpmake up its funding shortfall. For example, TxDOT is currently expanding the lanes onthe Katy Freeway, as discussed in more detail below, in partnership with HCTRA.HCTRA is expanding the current two HOV lanes and converting them, plus additionalright-of-way, into four high occupancy toll (HOT) lanes that it will operate and collectrevenue on. To do this, HCTRA has entered into an agreement with TxDOT that paysTxDOT $250M outright and provides another $250M in loans (TxDOT/ HCTRAMemorandum of Agreement 2003). This agreement is much different than the free rightof-way20 years earlier for the Sam Houston Toll Road right-of-way.378

Discussions with interviewees with knowledge of both TxDOT and HCTRA have statedthat the new ability of TxDOT to toll, and their subsequent desire to earn a return on theirright-of-way, similar to the TxDOT/HCTRA agreement for the Katy Freeway expansion,has started to create friction between the two organizations. While TxDOT has thenewfound powers of tolling, forces appear to be at work to limit the exercise of thispower, at least in urban areas. The culture of TxDOT itself is firmly rooted inconstruction and not in operations. As one interviewee with knowledge of TxDOTresponded, this culture of construction, combined with the difficulties TxDOT hasencountered trying to expand or build new roads in the urban environment of Houstonhas made TxDOT and other political players start to look for other “playgrounds” forTxDOT. In support of this notion, H.B. 3588 also moves forward with the idea of theTrans-Texas Corridor, a massive multi-modal tolled facility running the north-southlength of Texas. With support from local agencies and business groups for keeping tollrevenues local (Great Houston Partnership 2006), TxDOT may be preparing, or forced, toexit major toll road construction in urban areas in the near future.An effect of H.B. 3588 / 2702 appears to be the changing of relationships betweenTxDOT and other local agencies. As TxDOT can now directly price their right-of-way,all indications, and interviewees with knowledge on the subject agreed, appear to be thatTxDOT will carefully value their right-of-way and require any agency wanting to use orconvert use of that right-of-way in the future to pay a price. This may be furthercomplicated by continuing disagreements on funding and distribution of revenue sourcesbetween state and local control. Overall, H.B. 3588 / 2702 appear to have added to thecomplexity, at least in the short-term, for an already fragmented local transportationsystem.The following four sections present the results of the four questions asked during theinterviews. As a reminder, the four questions considered were:1. Can you provide examples where flexibility is currently being used by yourorganization or by other organizations?2. If flexibility is used, can you provide examples of processes used by yourorganization to identify, design, evaluate or manage flexibility?3. What is your organization’s position on the benefits and costs associated withflexibility?4. What are the critical enterprise and institutional architecture challenges that havebeen encountered by your organization?379

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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

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    as HOT or TOT lanes. This can be es

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    BuildtraditionalinfrastructureDelay

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    HOT / BRTlaneNon-flexibleTOT / BRTl

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    BuildtraditionalinfrastructureDelay

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    or improved safety functions could

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

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    8 VALUE OF FLEXIBILITY IN HOUSTON G

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    attempt was made to completely repr

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    Figure 8-4 Quantitative analysis pr

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    8.2.1.1 Travel Demand ModelingThe t

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    ange of traffic analysis studies to

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    I-10 KatyFreewayI-610(innerloop)Bel

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    5 lanesFigure 8-10 Example of satel

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    Beltway 8(secondary loop)I-610 (inn

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    8.2.2.5 Major Modeling AssumptionsD

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    from a public agency that is intere

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    funding improvements that would pre

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    This is because of the low-cost of

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    From the analysis above, with the d

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    Figure 8-16 Addition of two general

  • Page 327 and 328: capabilities are typically deployab
  • 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
  • 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: The resulting plan forecasted more
  • 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
  • Page 389 and 390: The federal level interviewee conti
  • Page 391 and 392: may not be tied to a physical proje
  • Page 393 and 394: During the interview process, sever
  • Page 395 and 396: Figure 9-15 Katy Freeway configurat
  • Page 397 and 398: Monitor/ManageFigure 9-16 Summary o
  • Page 399 and 400: company on a schedule to complete t
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  • Page 403 and 404: facilities has created a lack of wi
  • Page 405 and 406: eversible HOV lanes as a safety pre
  • Page 407 and 408: the real option and the decision to
  • Page 409 and 410: • Mechanism for creating pressure
  • Page 411 and 412: 9.9.2.2 Uncertainty as a Result of
  • Page 413 and 414: option purchase price. This was bec
  • Page 415 and 416: 9.10 REFERENCESABC7. (2004) Chicago
  • Page 417 and 418: Judd, D. and T. Swanstrom. (2004) C
  • Page 419 and 420: 10 FINDINGS AND CONCLUSIONSChapter
  • Page 421 and 422: concerns the use of real options
  • Page 423 and 424: Table 10-1 Summary of major researc
  • Page 425 and 426: to a system. Rather, these options
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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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