Flexible system development strategies for the Chuo Shinkansen Maglev Project : dealing with uncertain demand and R&D outcomes
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173417972-MIT.pdf
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Author(s)
Ishii, Masaki, S.M. Massachusetts Institute of Technology
Advisor(s)
Joseph M. Sussman.
Date Issued
2007
Publisher
Massachusetts Institute of Technology
Abstract
As a large-scale, long-term transportation project, the Chuo Shinkansen Maglev Project in Japan includes various uncertainties. Among them, two major uncertainties are identified in this thesis: the uncertainty of demand and the risk of R&D. Because each Maglev train requires a dedicated Power Conversion System (PCS) but a different one as it moves along the route, it is required to estimate the future demand accurately to determine the number of PCSs to construct. At the same time, the R&D to advance the technologies of PCS has the possibility of improving the project value by enabling staged flexible system development strategies. Since it is difficult to correctly estimate demand and R&D results, a framework that can evaluate projects with explicit considerations of these uncertainties is needed. In the light of the above background, this thesis develops a quantitative model that is appropriate for evaluating the Chuo Shinkansen Project. More specifically, this thesis applies the hybrid real options model, which is suitable for appraising projects with both market risks and R&D risks, in an innovative manner, addressing four major complexities that arise when applying the model to the project:
(cont.) the difficulty of estimating the demand of a new train system, identification of the possible system designs that vary depending on R&D results, necessity to incorporate capacity constraints into analysis, and the selection of the appropriate discount rate. Analyzing the data and the characteristics of the Chuo Shinkansen Project, this thesis develops an evaluation model that addresses above issues. Using the quantitative analytic model developed herein and assuming reasonable estimates of R&D costs, probability of success in R&D project, demand growth, volatility of demand, and the discount rate, this thesis estimates the value of the Chuo Shinkansen Project and concludes that it will be advantageous to invest in the R&D of the PCS technology despite its large cost. The thesis also conducts sensitivity analyses to demonstrate how the evaluation model developed in this thesis can be used to analyze the effects, on the project value, of changes in the probability of R&D success (in relation to R&D costs), demand growth and its volatility, and the discount rate, to obtain implications for the development strategies for the Chuo Shinkansen Project.
Description
Thesis (S.M.)--Massachusetts Institute of Technology, Engineering Systems Division, 2007.
Includes bibliographical references (p. 153-158).
Subjects
Engineering Systems Division.
MIT Department
Massachusetts Institute of Technology. Engineering Systems Division
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