FLEXIBILITY IN DESIGN - Title Page - MIT

de Neufville + Scholtes D R A F T September 30, 2009More generally, shifting the target curves to the right improves performance. Movingthe curve to the right means that higher targets have a higher chance of being achieved. This is acrucial paradigm for the design of systems under uncertainty. We need to find designs thatachieve this improved performance.[Figure 3.10 about here]Now that we have found a way to articulate improve performance under uncertainty, wecan try to understand why we get this result. Developing our understanding of how the systemresponds to uncertainties will help us develop solutions that maximize performance. In this case,the reason smaller designs are less likely to lose money is clear: if you invest less at the start,you reduce the maximum amount you can lose. Of course, this does not mean we should alwaysinvest less; spending more – for example in enabling flexibility – if often the way to increaseoverall expected value.[Box 3.5 about here]Phasing investments: We can phase investments to reduce initial cost and therefore themaximum exposure to loss. The phasing can either be fixed, in that it follows a predeterminedschedule, or it can be flexible in that the later stages are optional.Phased design can be a good idea even without the recognition of uncertainty. Deferringthe cost of building capacity until it is needed saves on financing costs. At a reasonableopportunity cost of capital, 10% for example, deferring capital expense by 4 years reduces thepresent value of each deferred dollar to 70 cents. However, the economies of scale thatdesigners might achieve by building capacity all at once counterbalance the potential savings ofphasing to some degree. 4 The value of phasing needs careful consideration.Based on the projected demand growth for the parking garage, it would be reasonable toplan a fixed phased expansion. The idea would be to add floors one by one, tracking theprojected demand as follows:• Begin with 4 levels;• Expand to 5 levels in year 3;• Expand to 6 levels in year 4, and• Expand to 7 levels in year 7.Note that phasing requires the original design to incorporate the ability to expand. In this case,planned phasing to 7-levels means that we would have to build the first 4-level phase with extralarge columns and foundations, sufficient to carry the eventual loads of a higher structure. Weassume this cost adds 30% of the cost of the first two levels.From the perspective of a standard NPV analysis based on projected demand, this fixedphasing more than doubles the NPV of the project, from 2.5M for a fixed 6-level design to 5.4Mfor the phased design (see Table 3.5). From the naïve perspective therefore, a fixed phasing ofPart 1: Chapters 1 to 3 Page 51 of 69