A Case Study on Automotive Battery System Design - Title Page - MIT

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to invest in a project that will expire at a given time. An example of a real option “on” a projectmight be for expansion of a pharmaceutical venture, or whether or not to invest in expansiongiven a risky outcome on the venture itself (Johnson & Li, 2002). This decision requires little tono knowledge of the underlying technology; an analyst could determine the option value (thevalue of expansion with a good outcome) by speaking with experts. There is no flexibility “in”the design, just flexibility in expansion (or shut down) decisions. The project itself is a “blackbox” with underlying, unknown technology.The Ford project was interested in real options “in” a project. In this thesis, the options are notobvious, as the key area of flexibility comes from technical knowledge of the system and thechallenges that exist within the core technology, described in detail in Chapter 4. These optionsare typically built into the system during product design and are designed with a long time frameof uncertainty, both in requirements and scale. Additionally, they require knowledge of theunderlying technology for engineering design of these options(Wang & de Neufville, 2005).Flexibility within the system enables the option to be taken through active participation at afuture date (or allowed to expire). Valuation of these options is highly challenging, as the valuesare unknown due to the unique nature of the project. Frequently the question of value has neverbeen asked, or the underlying technology provides indirect value only.As an example of the complexity in valuation of engineering components “in” a system, inautomotive the consumer drives the car and assesses how it feels.Individualcomponents/attributes provide indirect value to the consumer. Without these attributes, thecustomer cares, as the car doesn’t start or perform. Without brakes a car has no value; customersexpect them. Valuing the brakes is a difficult process.28
In a financial analysis, the engineering cost and unit cost of brakes will provide a substantialnegative NPV. With a black box view, a financial analyst might ask to remove thesecomponents due to lack of direct value to the customer. The engineering team will considerthem non-negotiable for operation of the “black box”, i.e. the automobile. Then they may agreeon the lowest unit cost possible to meet performance. The traditional cost analysis is difficult toutilize and can potentially lead to wrong answers, without stakeholder cooperation (in this casethe consumer, the engineer, and the analyst).When designing real options “in” a system, the components themselves often have value to theengineering team and not to the customer, creating an asymmetric response from management.Justification of added cost for an option can only be done if engineering value can be tied tocustomer value. An example provided by de Neufville of a real option for a consumer “in” anautomobile is the spare tire. It is used if and when it is needed, but otherwise held in the trunk ofthe car and designed to be similar to the existing tire. The purchase of the spare tire is a realoption, designed as insurance against a possible outcome. There is added cost (and time) for theconsumer, but it’s designed to be used under the potential condition of a tire failure(de Neufville,et al., 2004). The customer values this additional security and is willing to pay for it.An additional element of real options “in” projects is path dependency. Decisions will be madeupon incoming data. In early stage development, with a great deal of uncertainty, a stagedinvestment plan can be a valuable flexibility. The Iridium satellite phone constellation is atypical engineering-style project. The design of the system is a complex, but tractable,engineering optimization. However, there is a large uncertainty in total demand. Thedeployment time for the satellite system is long; multiple launches are required. Adoption rate ofthe technology is highly uncertain and, in retrospect, it is clear that the emergence of a competing29
Page 1 and 2: SYSTEM ARCHITECTURE DECISIONS UNDER
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Page 7 and 8: Figures and TablesTable 4.1: Curren
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Page 11 and 12: Chapter 2: Literature Survey—Flex
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Page 17 and 18: Meyer defines the steps to product
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Page 25 and 26: 3.2: The Garage Case</stron
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Page 35 and 36: ) Voltage/current may be different
Page 37 and 38: An FHEV or PHEV has different contr
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Page 59 and 60: Clayton, M. (2012, March 5). Chevy
Page 61 and 62: Stenquist, P. (2011, 1 28). New Yor
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