Impacts of project management on real option values

IMPACTS OF PROJECT MANAGEMENT ON REAL OPTION VALUES

A Thesis by SHILPA ANANDRAO BHARGAV

Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE

December 2004

Major Subject: Civil Engineering

IMPACTS OF PROJECT MANAGEMENT ON REAL OPTION VALUES

A Thesis by SHILPA ANANDRAO BHARGAVSubmitted to Texas A&M University in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE

Approved as to style and content by:

David Ford (Chair of Committee)

Stuart Anderson (Member)

Joe Horlen (Member)

Paul Roschke (Head of Department)

December 2004 Major Subject: Civil Engineering

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ABSTRACT
Impacts of Project Management on Real Option Values.(December 2004) Shilpa Anandrao Bhargav, B.E., University of Pune Chair of Advisory Committee: Dr. David N. Ford

The cost of construction projects depends on their size, complexity, and duration. Construction management applies effective management techniques to the planning, design, and construction of a project from conception to completion for the purpose of controlling time, cost andquality. A real options approach in construction projects, improves strategic thinking by helping planners recognize, design and use flexible alternatives to manage dynamic uncertainty. In order to manage uncertainty using this approach, it is necessary to value the real options. Real option models assume independence of option holder and the impacts of underlying uncertainties on performance andvalue. The current work proposes and initially tests whether project management reduces the value of real options. The example of resource allocation is used to test this hypothesis. Based on the results, it is concluded that project management reduces the value of real options by reducing variance of the exercise signal and the difference between exercise conditions and the mean exercise signal.iv

DEDICATION

Dedicated to Aai, Papa, Dada and Monish

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ACKNOWLEDGMENTS
I would like to thank my committee chairman, Dr. David Ford, for giving me an opportunity to pursue this research. I am grateful to him not only for his academic guidance but also for his continuous support, encouragement and patience during the course of my research. I thank my committee members Dr. StuartAnderson, and Joe Horlen, J.D, for being a part of my committee. I remain indebted to them for the strong fundamentals that they provided in the courses that they taught me. I thank the administrative staff of the Civil Engineering Department for their cooperation and help in administrative matters. I am grateful to my colleagues and friends for being an important and enriching part of my Aggielife. I thank my Aai and Papa (mom and dad) and Dada (brother) for their incessant support, love and blessings through all these years. I owe all my success to them. Last but not least I thank my husband, Monish, for standing by my side and being there for me, forever and for always.

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TABLE OF CONTENTS
Page ABSTRACT..................................................................................................................... iii DEDICATION ..................................................................................................................iv ACKNOWLEDGMENTS..................................................................................................v TABLE OF CONTENTS..................................................................................................vi LIST OF TABLES ......................................................................................................... viii LIST OF FIGURES...........................................................................................................ix I. INTRODUCTION.....................................................................................................1 Project...