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Research Papers: Design Automation

Robustness and Real Options for Vehicle Design and Investment Decisions Under Gas Price and Regulatory Uncertainties

[+] Author and Article Information
Namwoo Kang

Mechanical Systems Engineering,
Sookmyung Women's University,
Seoul 04310, South Korea
e-mail: nwkang@sm.ac.kr

Alparslan Emrah Bayrak

Mechanical Engineering,
University of Michigan,
Ann Arbor, MI 48109
e-mail: bayrak@umich.edu

Panos Y. Papalambros

Mechanical Engineering,
University of Michigan,
Ann Arbor, MI 48109
e-mail: pyp@umich.edu

1Corresponding author. A previous version of this manuscript was presented at the ASME 2016 International Design & Engineering Technical Conferences, Charlotte, NC, Aug. 21–24.

Contributed by the Design Automation Committee of ASME for publication in the JOURNAL OF MECHANICAL DESIGN. Manuscript received November 18, 2017; final manuscript received June 13, 2018; published online July 31, 2018. Editor: Wei Chen.

J. Mech. Des 140(10), 101404 (Jul 31, 2018) (11 pages) Paper No: MD-17-1772; doi: 10.1115/1.4040629 History: Received November 18, 2017; Revised June 13, 2018

Manufacturers must decide when to invest and launch a new vehicle segment or how to redesign vehicles existing segment under market uncertainties. We present an optimization framework for redesigning or investing in future vehicles using real options to address uncertainty in gas price and regulatory standards like the U.S. Corporate Average Fuel Economy (CAFE) standard. In a specific study involving a product of gasoline, hybrid electric, and electric vehicles (EV), we examine the relationship between gas price and CAFE uncertainties to support decisions by manufacturers on product mix and by policy makers on proposing standards. A real options model is used for the time delay on investment, redesign, and pricing, integrated with a robust design formulation to optimize expected net present value (ENPV) and net present value (NPV) robustness. Results for nine different scenarios suggest that policy makers should consider gas price when setting CAFE standards; and manufacturers should consider the trade-off between ENPV and robust NPVs. Results also suggest that change of product mix rather than vehicle redesign better addresses CAFE standards inflation.

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Figures

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Fig. 1

Generated SGs for gas price and CAFE standard for a vehicle with footprint 45 sq-ft: (a) gas price scenarios and (b) CAFF standard scenarios

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Fig. 2

Validation of gas price model

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Fig. 3

Attributes importance according to gas price

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Fig. 4

CAFE results for nine SGs

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Fig. 6

ENPV versus robustness

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