Uncertain Future Conditions Research Articles

A real options model for valuing flexible space

The continuous need for change in corporate real estate spaces warrants consideration of flexibility in new space design. To help decision makers invest more effectively in physical infrastructure and its ability to evolve, a formal method of identifying and valuing flexibility is developed. A model, based on real options techniques for valuing managerial flexibility, is constructed to answer the following question: how much is it worth to invest in a space that could be renovated to office space for a specified renovation cost in the future? Decision makers can use the option valuation results to determine whether the initial design and construction costs to achieve flexibility are justifiable. The transparent model is intended to be accessible to design teams in practice. It is an improvement on net present value and first‐cost based decision‐making techniques in that it explicitly accounts for uncertainty and for the ability of managers to make a rational future decision (between renting and renovating). The model considers three sources of uncertainty: the market price of rent for office space (as measured by volatility); date of space need; and amount of space need. Input values and/or probability distributions are needed for these variables. The model is constructed using a binomial lattice technique and Monte Carlo simulation. Results are given in a format that allows for comparison with cost estimates of physical architectural designs. For example, in a case study where current five‐year office‐space leases are estimated at US$98 per square foot and 0.39 annual volatility and the mean amount of space needed in the future is 50 per cent of the total, the real options valuation suggests that it is worth up to US$40 per square foot in initial investment expenses to achieve a space that could be renovated to office space for US$25 per square foot within the next eight years. The concept of addressing risk through ‘flexible design’ and analysing the value of flexibility is pertinent to judicious management of any new building project that is subject to uncertain future conditions.

An Efficient Real-Time Method for Improving Intrinsic Delay of Capacity Allocation in Interactive GEO Satellite Networks

An interactive satellite network consists of a hub, a geostationary Earth orbit (GEO) satellite, and a group of terminals. Terminals in need of capacity send a capacity request (CR) message to the hub and the hub then makes a capacity-allocation schedule according to the CR and broadcasts that schedule to the terminals. Thus, it takes the round-trip time plus the scheduling time for a terminal to receive a response from the hub. Due to such intrinsic delay between capacity request and capacity allocation, it is difficult to promptly transmit user data via interactive channels of GEO satellites. The preferred solution to this problem is to have a prediction-based resource-allocation policy and to have as short a period of scheduling time as possible. As a solution to use such policies, we mathematically formulate a resource-allocation problem as a nonlinear integer programming problem considering uncertain future traffic conditions and we develop a real-time heuristic solution algorithm. Computational complexity analysis and extensive simulation results demonstrate the excellent performance of the proposed method on computational efficiency and heuristic solution quality.

Cost effective utilities energy plans optimization and management

Utilities have to develop and recommend integrated, reliable and cost-effective approaches for meeting the future demand and energy needs of their customers. This plan should be updated biennially to provide management with a current basis for making prudent short-term decisions and to establish long-term direction. Integrated resource planning techniques, consistent with the concepts of least-cost planning, should be used as the basis for developing recommendations for the plan. Changes in the national and local energy economy and business environment present significant uncertainty and challenge. In order to manage effectively in this uncertain environment, utilities should place great emphasis on planning. One of the key planning tools used by utilities to help achieve their strategic goals is the energy plan. Resource plans recommended by the energy plan should be considered in conjunction with the overall capital and operating and maintenance expense requirements of the utilities to ensure the ongoing financial integrity of all utility operations. This information, along with engineering judgements, is used in reaching a decision as to which integrated resource plan should be pursued. The energy planning process, documented in this paper, develops and analyzes options available to different utilities for meeting their energy supply obligations. These options include demand-side and supply-side alternatives which are evaluated on an equal basis. Cost-effective options are integrated into plans that achieve the corporate objective of providing reliable service at the lowest reasonable cost under a range of uncertain future conditions. The energy plan develops plans which recognize the contribution to be expected from new energy use management programs and addresses the need for developing flexible plans which are adaptable to changing conditions and quantify the cost of this flexibility as it relates to different supply-side resource decisions. Finally, this energy plan should recommend options that have the flexibility to adapt to a range of uncertain conditions in a reliable and economical fashion.

Strategic Planning for a National Waterways System

Risk and Uncertainty dictated the study design developed for the Congressionally mandated National Waterways Study (NWS). The need for the strategic planning concept adopted for the NWS is explained in terms of the current federal, state and private planning environments. The paper reviews the uncertainties under which planning is carried out. The results of analyses of future water transportation use and system capability under a mix of future conditions is summarized. Finally, strategies posed to meet waterway capability needs under uncertain future conditions are described.