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Framework for the Identification and Valuation of Design Option Flexibilities Under Uncertainty Open Access

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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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