Valuing Flexible Manufacturing Facilities as Options

Posted: 16 Oct 1998

See all articles by Andrew H. Chen

Andrew H. Chen

affiliation not provided to SSRN

James A. Conover

University of North Texas - Department of Finance (FIREL)

John Kensinger

University of North Texas - Department of Finance, Insurance Real Estate and Law

Abstract

Models for valuing an option to exchange one commodity for another, or any combination of n input commodities for some combination of m outputs, are applied to the capital budgeting problem, making it possible to draw sound conclusions about the valuation effects of flexibility and innovativeness. New algorithms enable practical application of the model to complex flexible manufacturing facilities. Careful attention to estimating the matrix of correlations among the prices of potential inputs and outputs involves explicit integration of financial analysis and strategic analysis especially the influence of substitutes and the anticipated reactions of competitors, suppliers, and potential new entrants.

JEL Classification: G31, G32, L60

Suggested Citation

Chen, Andrew H. and Conover, James A. and Kensinger, John W., Valuing Flexible Manufacturing Facilities as Options. Available at SSRN: https://ssrn.com/abstract=129132

Andrew H. Chen (Contact Author)

affiliation not provided to SSRN

James A. Conover

University of North Texas - Department of Finance (FIREL) ( email )

FIREL Department
Denton, TX 76203-5339
United States
940-565-3061 (Phone)

John W. Kensinger

University of North Texas - Department of Finance, Insurance Real Estate and Law ( email )

Denton, TX 76203
United States

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