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, 2009Figure 3.13: Vertical expansion of Health Care Service Corporation building in Chicago incenter of image. Phase 1 (left) and Phase 2 (right)(Source: Goettsch Partners release to Wittels and Pearson, 2008).Part 1: Chapters 1 to 3 Page 68 of 69
de Neufville + Scholtes D R A F T September 30, 20091 Several open source and commercial software packages are available to perform thesecalculations. We used XLSIM to calculate and graph the results in this book.2 A histogram divides the range of a distribution into subdivisions of equal size, counts thenumber of occurrences of an outcome within each smaller range, and shows this number as avertical bar. This process shows the frequency of ranges of outcomes, which is the probabilitydistribution. In the example, part of the Monte Carlo software took the range of the 10,000realized NPVs (approximately between -35M and +11M) and divided it into 10 regions of equalwidth, about 4.6M in this case. The height of the bar associated with each bin measures thefraction of the 10,000 realized NPVs that fall into the respective range. For example, about 5% ofthe sampled NPVs fell between -17M and -12M; about 32% between 6M and 11M.3 The concept of “Value at Risk” or VAR has been widely used in finance. It refers to the amountthat might be lost, or the target that the design might not attain, with a specified probability. TheValue at Gain” or VAG is the complementary probability of what might be gained. The cumulativeprobability curve is thus sometimes referred to as the VARG or Value-at-Risk-and-Gain” curve.4 The economies that designers can achieve by building capacity all at once include botheconomies of scale and the costs avoided by not working on expanding a facility that is inoperation. Unless designers carefully plan future expansion, it can be problematic to constructaround on-going operations. As regards economies of scale, Manne (1967) clearly presents theinterplay between the discount rate (a higher one motivates deferring development), the degreeof economies of scale (greater savings by building large encourage early development) and therate of growth, which determines the size of expansion increments.5 See Cardin (2007) for a discussion of the effect of many different decision rules for expansion.6 For details see Guma et al (2009), Guma (2008) and Wittels and Pearson (2008).7 The case is extrapolated from an actual project in the Bluewater development in England(http://www.bluewater.co.uk/ ). The numbers used are representative, but do not correspond tothose of the actual project. Chapters 1 and 6 also mention this garage case. A version of itappears in de Neufville and Scholtes (2006).Part 1: Chapters 1 to 3 Page 69 of 69
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de Neufville + Scholtes D R A F T September 30, 2009Figure 3.13: Vertical expansion of Health Care Service Corporation building in Chicago incenter of image. Phase 1 (left) and Phase 2 (right)(Source: Goettsch Partners release to Wittels and Pearson, 2008).Part 1: Chapters 1 to 3 <strong>Page</strong> 68 of 69
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