Capacity investment planning based on real options

Tony Rosqvist

Research output: Chapter in Book/Report/Conference proceedingChapter or book articleProfessional

3 Citations (Scopus)

Abstract

Capacity management of a plant in capital-intensive industries is a challenging task: volatile markets, aging and deteriorating equipment and a competitive environment raise challenges for capacity management. Essentially, capacity management is decision-making under uncertainty at the plant-level. Risk-informed, dynamic, capacity management is a prerequisite for achieving optimal capacity in a production plant. One way to deal with uncertainty is the active management of real options. Investment portfolios consisting of real options provide opportunistic value in capacity investment decision-making. A framework for the specification, evaluation and exercising of real options is presented for capacity managers. The analysis is based on a decision cycle which is temporally divided into two market outlook periods. The first market outlook period represents the current, emerging market situation for which real options, planned in the previous decision cycle, may be exercised, thus optimising production capacity according to current demand. The second period represents an uncertain production environment for which real options can be planned, based on demand & supply forecasts. The decision cycles repeat, each entailing planning, evaluation and exercising of real options included in the investment portfolio. The framework supports the computation of the probability distribution of profits coupled with alternative investment portfolios. The paper introduces a straightforward way of adopting options theory in the context of real options in capacity management.
Original languageEnglish
Title of host publicationDefinitions, Concepts and Scope of Engineering Asset Management
EditorsJoe E. Amadi-Echendu, Kerry Brown, Roger Willett, Joseph Mathew
PublisherSpringer
Pages137-155
ISBN (Electronic)978-1-84996-178-3
ISBN (Print)978-1-84996-177-6
DOIs
Publication statusPublished - 2010
MoE publication typeD2 Article in professional manuals or guides or professional information systems or text book material

Publication series

NameEngineering Asset Management Review
PublisherSpringer
Volume1
ISSN (Print)2190-7846
ISSN (Electronic)2190-7854

Fingerprint

Real options
Capacity investment
Investment planning
Capacity management
Investment portfolio
Evaluation
Probability distribution
Investment decision-making
Industry
Emerging markets
Uncertainty
Optimal capacity
Competitive environment
Planning
Production capacity
Managers
Profit
Decision making under uncertainty
Option theory
Alternative investments

Cite this

Rosqvist, T. (2010). Capacity investment planning based on real options. In J. E. Amadi-Echendu, K. Brown, R. Willett, & J. Mathew (Eds.), Definitions, Concepts and Scope of Engineering Asset Management (pp. 137-155). Springer. Engineering Asset Management Review, Vol.. 1 https://doi.org/10.1007/978-1-84996-178-3_8
Rosqvist, Tony. / Capacity investment planning based on real options. Definitions, Concepts and Scope of Engineering Asset Management. editor / Joe E. Amadi-Echendu ; Kerry Brown ; Roger Willett ; Joseph Mathew. Springer, 2010. pp. 137-155 (Engineering Asset Management Review, Vol. 1).
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Rosqvist, T 2010, Capacity investment planning based on real options. in JE Amadi-Echendu, K Brown, R Willett & J Mathew (eds), Definitions, Concepts and Scope of Engineering Asset Management. Springer, Engineering Asset Management Review, vol. 1, pp. 137-155. https://doi.org/10.1007/978-1-84996-178-3_8

Capacity investment planning based on real options. / Rosqvist, Tony.

Definitions, Concepts and Scope of Engineering Asset Management. ed. / Joe E. Amadi-Echendu; Kerry Brown; Roger Willett; Joseph Mathew. Springer, 2010. p. 137-155 (Engineering Asset Management Review, Vol. 1).

Research output: Chapter in Book/Report/Conference proceedingChapter or book articleProfessional

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Rosqvist T. Capacity investment planning based on real options. In Amadi-Echendu JE, Brown K, Willett R, Mathew J, editors, Definitions, Concepts and Scope of Engineering Asset Management. Springer. 2010. p. 137-155. (Engineering Asset Management Review, Vol. 1). https://doi.org/10.1007/978-1-84996-178-3_8