System Architecture to the Identification and Valuation of Design Option Flexibilities under Uncertainty

By Cesar Casanova, Shahram Sarkani and Thomas A. Mazzuchi.

Published by The International Journal of the Constructed Environment

Format Price
Article: Print $US10.00
Published online: January 29, 2016 $US5.00

Previous studies in real options and decision-making have been primarily focused on obtaining the Net Present Value (NPV) of a certain project or investment; however, this method does not account for the entire spectrum of an investment. This approach becomes less valuable when analyzing the entire system rather than just the valuation of the specific element of the system due to (1) vaguely capturing the uncertainty, volatility, and owner requirements of the investment; (2) proposed alternatives and flexibilities enabling a smaller risk factor in volatility and uncertainty; and (3) a systematic approach to capture and treat the investment as a system. This proposed study builds on the real options idea which supports a systems thinking approach to decision-making by considering a board spectrum of real options under various uncertainties in order to improve the limitations of a simple NPV approach. The proposed systems architecture is broken up into five unique components: (1) Initial Design; (2) Volatility and Uncertainty Recognition; (3) Alternate Generation/Design Flexibilities; (4) Real Options Valuation; and (5) Delivery and Management. The modeling results generated can be used to support decisions made in the planning stages of a new project by comparing and analyzing results using the Binomial Lattice Valuation.

Keywords: Design Flexibility, Real Options Approach, Design Structure Matrix, Engineering System Architecture, Options Valuation, Design Decision Making, Alte4rnatives Valuation, Binomial Lattice

The International Journal of the Constructed Environment, Volume 7, Issue 2, June 2016, pp.37-53. Article: Print (Spiral Bound). Published online: January 29, 2016 (Article: Electronic (PDF File; 926.954KB)).

Cesar Casanova

Ph.D Student, Department of Engineering Management and Systems Engineering, School of Engineer and Applied Science, George Washington University, Washington, DC, USA

Dr. Shahram Sarkani

Professor of Engineering Management and Systems Engineering, and Director of EMSE Off-Campus Programs, Engineering Management and Systems Engineering, The George Washington University, Washington, DC, USA

Dr. Thomas A. Mazzuchi

Professor of Engineering Management and Systems Engineering, Engineering Management and Systems Engineering, The George Washington University, Washington, DC, USA