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

    SeriesEngineering Asset Management Review
    Volume1
    ISSN2190-7846

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  • 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