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"Complex" Real Options - Title Page - MIT

"Complex" Real Options - Title Page - MIT

convert the facility to

convert the facility to a LRT line, held by Metro the regional transit authority. The resultwas political battles along the entire life-cycle of the option, from purchase, managementand exercise.Third, the existence of flexibility creates externalities for other stakeholders which willthen resist the presence of flexibility in the first place. One stakeholder’s flexibilitycreates uncertainty for other stakeholders that can only be resolved at the time of theexercise of the option. Because of the fragmentation of stakeholders, fragmentation inthe option holder role and the creation of externalities from flexibility, managerialflexibility was severely constrained in the ITS case study. Additional discussion of theseconstraints for the ITS case study can be found in Sections 9.8 and 9.9.In addition to these changes associated with “complex” real option, the very purpose ofusing real options in systems may be different.“Complex” real options can be designed to cope with uncertainties not appearing inthe real options research literature or even to accomplish objectives not associatedwith coping with system uncertainty at all.Table 10-5 summaries the uses for “complex” real options found in the case studies.Table 10-5 Difference in uses between “standard” and “complex” real options as foundfrom the two case studies.Uses forOptions“Standard”Uses“Alternative”Uses“Standard”Real Options• Means tocope withuncertainty“Complex” Real Options: Case StudiesBWB/Boeing Base ITS/Houston Case StudyStudy• Means to cope with • Means to cope withuncertaintyuncertaintyo Passenger o Travel demanddemand growth growthrate o Relative travelo Fuel pricesdemand growthbetween modes(single passenger, 2passenger, 3passenger and freight)• None • None found • Means to fight politicalbattles / compromise• Means to achieve secondbest solution• Mechanism to aid in optionexercise456

“Standard” real options are described in the literature as a means for addressinguncertainty. From the case studies, it was found that “complex” real options may be usedfor multiple purposes; the “standard” purpose of addressing uncertainty or “alternative”purposes as well. The “standard” purpose of addressing uncertainty for each case studyis described in Sections 4.4 and 7.7 for the BWB and ITS case studies.In the ITS case study, three alternative uses for real options were found. First was the useof flexibility to solve political battles and reach a compromise. Political battles foughtover competing alternative designs would be won or lost with the adoption of a singlealternative. Flexibility was seen as a way for the “loser” to keep open the possibility thattheir alternative could be adopted in the future. By forcing the winning alternative toinclude options that if exercised would change the system to the “losing” alternative, thesupporters of this alternative could continue to fight the same political battle in the future.Conversely, flexibility was seen as a way to postpone a political battle by including theoption to switch between alternatives in the future, in effect a compromise betweenmultiple stakeholders with preferences for different alternatives.Second, flexibility was seen as a mechanism to gain a second best solutions. In situationswhere the desired system could not be obtained because of funding issues, such as a LRTline, a similar system that was cheaper, such as a BRT line, was sought. Included in thesecond best solution would be options to upgrade it in the future to the preferred solution.This allowed stakeholders to move forward towards the preferred solution through theinclusion of options to upgrade or expand from the second best solutions.Third, options were seen as a means to exercise the same option. For options such as theexpansion of a pilot program to a full program or abandonment of the pilot program, thepossibility that the capabilities developed in the pilot program could be lost if theprogram is not expanded was used as a rationale to expand the program. In this case, theexpansion of the program was the desired outcome and the possible option outcome ofabandonment was used as a reason to exercise the option in a certain direction, that ofprogram expansion.These three examples from the ITS case study demonstrate how “complex” real optionscan be used for uses beyond those discussed in the literature on “standard” real options.Additional discussion of these “alternative” uses for flexibility can be found in Section9.9The difference between “standard” and “complex” real options can be further illustratedby re-examining the definition of a “standard” real option. This shows how each part ofthe “standard” real option definition changes when considering the design, evaluation andmanagement activities of a “complex” real option.The definition used in “standard” real options is that:The option holder has a right, but not the obligation, to take some actionnow or in the future at a predetermined cost457

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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

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    capabilities are typically deployab

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    Table 8-5 Benefit-Cost Ratios for K

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    35%30%25%Probability20%15%10%5%0%$(

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    Figure 8-20 NPV density function, w

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    Table 8-6 Summary of flexibility to

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    Figure 8-23 Comparison of ITS/delay

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    vehicles would continue to gain fre

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    Figure 8-24 Value of time savings f

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    This illustrates the importance of

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    Table 8-10 Summary of ITS case stud

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    Similar to the above discussion of

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    9 CHALLENGES OF FLEXIBILITY IN HOUS

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    new challenges as well as increase

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    9.2 QUALITATIVE ANALYSIS PROCESSPre

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    The qualitative research methodolog

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    to be able to answer the research q

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    Table 9-1 Functional activities per

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    USDOT, Volpe Center, Officeof Syste

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    3. If flexibility is used, can you

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    • Increased data sources - The no

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    importance that Harris County plays

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    Figure 9-7 H-GAC area of responsibi

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    Figure 9-9 State level stakeholders

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    9.3.2.3 State Legislators and Gover

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    met with business interests before

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    The resulting plan forecasted more

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    Discussions with interviewees with

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    Currently, the cross section of the

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    Also of interest is another part of

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    y the Southern Pacific Railroad. In

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    9.6 PROCESSES FOR IDENTIFYING, DESI

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    The federal level interviewee conti

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    may not be tied to a physical proje

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    During the interview process, sever

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    Figure 9-15 Katy Freeway configurat

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    Monitor/ManageFigure 9-16 Summary o

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    company on a schedule to complete t

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    interviewees commented on the ongoi

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    facilities has created a lack of wi

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  • Page 409 and 410: • Mechanism for creating pressure
  • Page 411 and 412: 9.9.2.2 Uncertainty as a Result of
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  • 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
  • Page 427 and 428: future option exercise can prevent
  • Page 429 and 430: Q1-2. The case studies provided a d
  • Page 431 and 432: Currently, the Silver Line right-of
  • Page 433 and 434: technical system as well as the soc
  • Page 435 and 436: In the ITS case study, the transpor
  • Page 437 and 438: system that the technical system is
  • Page 439 and 440: option exercise unlikely (building
  • Page 441 and 442: some future date. This type of wast
  • Page 443 and 444: DesignPhaseEvaluationPhaseManagemen
  • Page 445 and 446: ITS capabilities used to create the
  • Page 447 and 448: technical and social components of
  • Page 449 and 450: incorporated directly into the mode
  • Page 451 and 452: As defined in Section 2.6, the diff
  • Page 453 and 454: In the BWB case study, an enterpris
  • Page 455: For “standard” real options it
  • Page 459 and 460: From the research it was found that
  • Page 461 and 462: d. Evaluating the option with quant
  • Page 463 and 464: need for the system is, while simul
  • Page 465: 10.7 REFERENCESClemons, E. and B. G
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