Case Study
Rashmi Shahu
Abstract
Buildings are generally heavy, fixed, and normally irreversible once construction has been completed. Due to changing demands of the occupants, they may confront the need for future expansion or complete changeover. Due to economic-based irreversibility, the expansion or conversion of a constructed building requires the foundation and columns to be enhanced and such options for expansion or conversion are planned at the very beginning of construction. Enhancing the foundation and columns represents an up-front cost, but has a return in flexibility for future expansion. This trade-off can be viewed as an investment problem, in that a premium has to be paid first for an option that can be exercised later. An optimum choice is required to be taken for foundations versus flexibility trade-off in order to balance the expected profits that may arise from future expansion, i.e., the value of flexibility, and the cost of enhancing the foundation. The authors in this paper explain a case of an educational institution in order to show the value of flexibility. The value of flexibility in this case study is so significant that failure to account for flexibility is not economical.