English

Recognizing uncertainty =>different design (5 floors)10Expected NPV ($, Millions)50-5-10-152 3 4 5 6 7 8 9Number of FloorsTraditional NPVRecognizing uncertaintyGarage Case, etc de Neufville, Scholtes and Wang Slide 17 of 23Step 3: Introduce flexibility intodesign (expand when needed)Year0 1 2 3 19 20Demand 820 924 1,044 1,519 1,647Capacity 800 800 1,200 1,600 1,600Decision on expansionexpandExtra capacity 400Revenue $8,000,000 $8,000,000 $10,440,000 $15,190,000 $16,000,000Recurring CostsOperating cost $1,600,000 $1,600,000 $2,400,000 $3,200,000 $3,200,000Land leasing cost $3,600,000 $3,600,000 $3,600,000 $3,600,000 $3,600,000 $3,600,000Expansion cost $8,944,320Cash flow $2,800,000 -$6,144,320 $4,440,000 $8,390,000 $9,200,000Discounted Cash Flow $2,500,000 -$4,898,214 $3,160,304 $974,136 $953,734Present value of cash flow $30,270,287Capacity cost for up to two levels $6,400,000Capacity costs for levels above 2 $7,392,000Price for the option $689,600Net present value $12,878,287Including Flexibility => Another, better design:4 Floors with strengthened structure enabling expansionGarage Case, etc de Neufville, Scholtes and Wang Slide 18 of 239