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Real options evaluation of financial investment in flexible manufacturing systems in the automotive industry

Author

Listed:
  • John L. Evans
  • Duoxing Zhang

Abstract

With increasing technology advancement and global economic cooperation and competition, leading companies in the automotive industry are now refocusing on better operational performance through advanced technology, as well as being competitive, flexible and responsive to changing market conditions. Flexible Manufacturing Systems (FMSs) have once again become highly desirable in the configuration of high performance manufacturing systems for strategic manufacturing capability planning to achieve sustainable growth and market responsive production. Due to large investment requirements and long-term implications, the economic evaluation of financial investment in FMSs remains an important and challenging issue for strategic business planning and capital allocation. The research within illustrates an economic evaluation process for financial investments in an automobile engine plant for flexible production capability. Because of the application of advanced manufacturing technology and equipment with FMSs, the initial investment is relatively large and additional investment is needed to expand production capability to capture future growth opportunities. Since traditional Net Present Value (NPV) analysis alone may not fully justify the investment decision, real options analysis was, therefore, applied to evaluate the investment project in two phases, with the expansion investment viewed as a real option. Its exercise will depend on the initial investment and future market developments.

Suggested Citation

  • John L. Evans & Duoxing Zhang, 2009. "Real options evaluation of financial investment in flexible manufacturing systems in the automotive industry," International Journal of Automotive Technology and Management, Inderscience Enterprises Ltd, vol. 9(3), pages 275-289.
    • Handle: RePEc:ids:ijatma:v:9:y:2009:i:3:p:275-289
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