Case Study
Real Options by Spreadsheet: Parking Garage Case Example
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Key Idea Description
Performance Optimization of parking infrastructures using real options analysis, focused on a parking garage case study. This study analyzes the strategic benefits and economic viability of designing parking facilities with built-in flexibility, allowing for adaptive responses to future demand uncertainties over an extended period. It highlights how simplified spreadsheet-based real options can maximize cost-effectiveness and project flexibility
- Broad Area: Capacity expansion, Economic valuation
- Main issues of case: Determination of possible outcomes, Estimate of value of flexibility, Analysis of risk-reward
- Main analytic topics: Real options valuation through spreadsheet analyses, creation and interpretation of target curves, and scenario-based planning to derive strategic insights for parking garage development.
Insights
- Economic Valuation Through Real Options as a Standard:The study champions the integration of real options analysis into standard economic evaluations for infrastructure projects. By employing spreadsheet-based real options analysis, designers can quantify the value of design flexibility, allowing for adaptations based on actual future demands. This method helps to justify the upfront costs associated with higher flexibility, showing that it can lead to significant savings and higher returns by preventing over-investment in underutilized capacities.
- Risk Management via Scenario Simulation: The case emphasizes the importance of scenario-based planning in managing the uncertainties inherent in long-term infrastructure projects. By simulating various demand scenarios, the analysis provides a comprehensive view of potential economic outcomes, enhancing decision-making. This approach not only helps in identifying the most economically viable design under typical conditions but also evaluates the potential risks and rewards of different design choices, thereby optimizing the economic resilience of the project.
Training
Relevant lectures:
- Paradigm change in engineering systems and planning
- How to optimise design and decision-making under uncertainty
- How to manage the design process
Gallery
Abstract
Summary
Introduction to Real Options in Parking Garage Design
This technical case study by de Neufville, Scholtes, and Wang explores the application of real options analysis using spreadsheets to the design of a parking garage. By illustrating a straightforward method to evaluate flexibility in infrastructure projects, the study demonstrates how to enhance decision-making without relying on complex financial procedures.
Understanding the Project’s Scope
The case focuses on a multi-level parking garage, where demand on opening day is projected at 750 spaces, increasing exponentially at a rate of 750 spaces per decade. The economic analysis leverages basic data like annual revenue of $10,000 per space and operating costs of $2,000 per space, with the construction cost being $16,000 per space, increasing by 10% for each additional level above ground.
Real Options Analysis Using Spreadsheet
The real options analysis simplified by a spreadsheet approach involves three steps:
- Setup and Base Case NPV Calculation: Setting up a spreadsheet to reflect the most likely projections of future costs and revenues, calculating the standard engineering economic value—Net Present Value (NPV).
- Exploration of Uncertainty: Simulating possible scenarios to explore how uncertainties affect the NPV, which helps in understanding the economic impacts of different design decisions under varying future conditions.
- Flexibility Analysis: Evaluating the financial impact of design flexibility, such as the capability to add more levels in the future, and its cost-effectiveness compared to a rigid design.
Spreadsheet Analysis Insights
- Initial Findings: For a deterministic forecast, building six levels initially seems optimal with an apparent NPV of $6.24 million.
- Scenario Analysis: Recognizing demand uncertainty, simulations show that a smaller, five-level design might offer a better expected NPV of $2.94 million, reducing the risk of underutilization.
- Flexibility Benefits: Incorporating flexibility by initially building fewer levels (four) with the option to expand reduces potential losses and increases the potential for gain. The expected NPV with this flexible design is estimated at $5.12 million, highlighting an increase in both safety and profitability.
Case Study Conclusions
The spreadsheet-based real options analysis demonstrates that flexibility in design can significantly enhance the economic performance of infrastructure projects. It allows project managers to adapt to actual needs over time, improving the expected present value of the projects by up to 30% through proper staging and deployment. This approach is particularly valuable as it uses standard tools and data familiar to engineers and managers, making it accessible and justifiable in practical settings.
Practical Implications
This analysis underscores the importance of designing infrastructure with the future in mind, considering both the latest technology and the evolving needs of the community. By adopting a flexible approach to infrastructure development, planners and engineers can not only save costs but also increase the functionality and longevity of their projects