FLEXIBILITY IN DESIGN - Title Page - MIT
FLEXIBILITY IN DESIGN - Title Page - MIT FLEXIBILITY IN DESIGN - Title Page - MIT
de Neufville + Scholtes D R A F T September 30, 2009Box 3.1_____________________________________________________________________________Parking garage details 7The developer can lease the land for 15 years, after which the land and the garage revert to thelandowner. The cost would be $3,330,000 per year.The site can accommodate 250 cars per level. Due to variation in traffic, we assume thatthe average utilization of capacity over the year does not exceed 80% of installed capacity, i.e.,the effective capacity per level is 200 cars. The construction consultant estimates that given thelocal conditions it will cost $17,000 per space for pre-cast construction, with a 10% increase forevery level above 2, that is, beyond the ground level and the 1 st level up. This premium coversthe extra strength in the columns and foundations to carry the load of additional levels of thestructure and the cars.The average annual revenue per space used will be $10,000, and the average annualoperating costs (staff, cleaning, etc.) about $3,000 for each space. The entrepreneur uses a 10%discount rate.An expert consultant projected demand for parking spaces over the next 15 years.Based upon local conditions, future demand is assumed to be determined by 3 parameters:• Initial demand for parking during the first year of operation (750 spaces);• Demand growth during the first 10 years of operation (an additional 750 spaces, leadingto a demand of 1500 spaces in year 10); and• Demand growth after year 10 (an additional 250 spaces, leading to a saturation demandof 1750 spaces).These demand parameters would typically be estimated using demographic projections and pastdata from similar projects, and then used to define a ramp-up curve to the final demand of 1750spaces. Our example assumes this curve is of the formd(t) = 1,750-a*exp(-bt)with a and b chosen to match the year 1 and year 10 demands. This gives the demand curveover time shown in Figure 3.1 and Table 3.1.[Figure 3.1 and Table 3.1 here]____________________________________________________________________________Part 1: Chapters 1 to 3 Page 56 of 69
de Neufville + Scholtes D R A F T September 30, 2009Box 3.2_____________________________________________________________________________System changes the distribution of uncertaintiesIn the case of the parking garage, the capacity of the facility limits the maximum use andtherefore the upside potential of the facility.[Figure 3.6 here]_____________________________________________________________________________Box 3.3_____________________________________________________________________________Figure 3.7 here_____________________________________________________________________________Box 3.4_____________________________________________________________________________Reverse percentile graphThe reverse percentile graph is an alternate to the target curve. If displays the chance ofachieving a certain level of performance, rather than missing it. Thus, it shows a 100% chance ofgetting the lowest level, and ultimately no chance of exceeding the maximum level.Some people find the reverse percentile graph more intuitive. In some industries, it is thestandard way to present data. [Check what this curve/graph is called in the oil industry]The information in the reverse percentile graph for the parking garage, shown below, isthe same as in the target curve. In this case, there is about a 40% chance of realising an NPV of4M or more, a 60% chance of breaking even, and a 90% chance that a loss does not exceed 15M._____________________________________________________________________________Part 1: Chapters 1 to 3 Page 57 of 69
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de Neufville + Scholtes D R A F T September 30, 2009Box 3.2_____________________________________________________________________________System changes the distribution of uncertaintiesIn the case of the parking garage, the capacity of the facility limits the maximum use andtherefore the upside potential of the facility.[Figure 3.6 here]_____________________________________________________________________________Box 3.3_____________________________________________________________________________Figure 3.7 here_____________________________________________________________________________Box 3.4_____________________________________________________________________________Reverse percentile graphThe reverse percentile graph is an alternate to the target curve. If displays the chance ofachieving a certain level of performance, rather than missing it. Thus, it shows a 100% chance ofgetting the lowest level, and ultimately no chance of exceeding the maximum level.Some people find the reverse percentile graph more intuitive. In some industries, it is thestandard way to present data. [Check what this curve/graph is called in the oil industry]The information in the reverse percentile graph for the parking garage, shown below, isthe same as in the target curve. In this case, there is about a 40% chance of realising an NPV of4M or more, a 60% chance of breaking even, and a 90% chance that a loss does not exceed 15M._____________________________________________________________________________Part 1: Chapters 1 to 3 <strong>Page</strong> 57 of 69
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