Framework for the Identification and Valuation of Design Option Flexibilities Under Uncertainty Open Access
Previous studies in real options and decision making have primarily focused onobtaining the net present value (NPV) of a certain project or investment. However, thismethod does not account for the entire spectrum of an investment. It becomes lessvaluable when analyzing the entire system rather than just the valuation of a specificelement of the system because it (1) only vaguely captures the investment’s uncertainty,volatility, and owner requirements; (2) proposes alternatives and flexibilities that enable a smaller risk factor in volatility and uncertainty; and (3) uses a systematic method tocapture and treat the investment as a system. The method I propose builds on a realoptions idea, which supports a systems thinking approach to decision-making byconsidering a broad spectrum of real options under various uncertainties in order toimprove the limitations of a simple NPV approach. The proposed systems framework isdivided into five unique components: (1) Initial Design, (2) Volatility and UncertaintyRecognition, (3) Alternate Generation/Design Flexibilities, (4) Real Options Valuation,and (5) Delivery and Management. Results generated by the model can be used tosupport decisions made in the planning stages of a new project by comparing andanalyzing results using the binomial lattice valuation.
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