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Fuzzy Real Options Models for Closing/Not Closing a Production Plant

Christer Carlsson, Markku Heikkilä, Robert Fullér, Fuzzy Real Options Models for Closing/Not Closing a Production Plant. In: Cengiz Kahraman, Mesut Yavuz (Eds.), Production Engineering and Management under Fuzziness, 252/2010, 537-560, Springer, 2010.

Abstract:

In traditional investment planning investment decisions are usually taken to be now-or-never, which the firm can either enter into right now or abandon forever. The decision on to close/not close a production plant has been understood to be a similar now-or-never decision for two reasons: (i) to close a plant is a hard decision and senior management can make it only when the facts are irrefutable; (ii) there is no future evaluation of what-if scenarios after the plant is closed. However, it is often possible to postpone,modify or split up a complex decision in strategic components, which can generate important learning effects and therefore essentially reduce uncertainty. If we close a plant we lose all alternative development paths which could be possible under changing conditions; on the other hand, senior management may have a difficult time with shareholders if they continue operating a production plant in conditions which cut into its profitability as their actions are evaluated and judged every quarter. In these cases we can utilize the idea of real options. The new rule, derived from option pricing theory, is that we should only close the plant now if the net present value of this action is high enough to compensate for giving up the value of the option to wait. Because the value of the option to wait vanishes right after we irreversibly decide to close the plant, this loss in value is actually the opportunity cost of our decision. In this work we will use fuzzy real option models for the problem of closing/not closing a production plant in the forest products industry sector.

BibTeX entry:

@INPROCEEDINGS{inpCaHeFu10a,
  title = {Fuzzy Real Options Models for Closing/Not Closing a Production Plant},
  booktitle = {Production Engineering and Management under Fuzziness},
  author = {Carlsson, Christer and Heikkilä, Markku and Fullér, Robert},
  volume = {252/2010},
  editor = {Kahraman, Cengiz and Yavuz, Mesut},
  publisher = {Springer},
  pages = {537-560},
  year = {2010},
}

Belongs to TUCS Research Unit(s): Other

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