An investigation of financial valuation techniques applied to International Space Station (ISS) pre-planned product improvement (P3I) projects

The National Aeronautics and Space Administration (NASA) must continually evaluate proposals to upgrade its human space flight systems. These proposals may be initiated to enhance safety, improve performance or provide improved cost value. In the current restrictive budget environment the cost valuation should be strengthened to ensure the best use of limited funding.; As an example of these upgrade projects, the International Space Station (ISS) is a partnership of sixteen nations each providing significant space flight hardware systems. While some of the operating costs of the laboratory complex are shared, the cost to sustain and supply the hardware elements falls to the partner country that originally provided the element. The motivation to constrain these sustaining or operations costs drives the desire to identify, value and develop upgraded systems.; NASA has not frequently utilized financial analysis in project consideration. While the annual budgetary assessments must be complete, the business case analysis is often lacking. Some of the reasons driving the reluctance to use financial analysis are the uncertainty in the cost projections and gains, the political environment and the ability to value in a financial sense, gains which may seem intangible.; Over the last twenty years, the financial analysis and capital budgeting field has utilized a new technique called Real Option Analysis (ROA) to value real life projects under uncertainty. Many NASA projects are also burdened with similar uncertainties. This methodology utilizes the mathematics formulated by Black, Scholes and Merton for pricing options in the financial derivatives market. This doctoral research formulated a method for adapting the ROA to a number of ISS specific upgrade projects. In order to develop this methodology the projects had to be defined in terms of the critical variables of the Black-Scholes (B-S) valuation equation. Additional assessments of NASA historical cost performance were utilized to derive some of these B-S variables.; Based on discussions with the ISS program management, three projects were selected for analysis once the method was formulated. These projects were all actual projects that had been pursued as ISS upgrades in recent years. A standard Net Present Value (NPV) calculation was completed for each project, followed by two slightly different ROA methods. Each of the three projects demonstrated a strong positive valuation in both the NPV and ROA calculations. The formulation of the three test cases provided significant insight to the critical B-S parameters in the NASA specific cases.; The formulation of an appropriate ROA methodology was successfully demonstrated through this research. The projects selected, however, did not demonstrate the unique value of the ROA technique. All three of the test cases demonstrated strong positive NPV's. Due to these positive values, the advantage of the ROA methodology is not strongly demonstrated. Several projects in the future transition of the Space Shuttle and ISS to NASA's new systems appear to be excellent candidates for this form of analysis. NASA will be facing decisions to maintain, expand or abandon facilities and systems. Many of these decisions fit the form of the option problems analyzed with ROA.