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research-article

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

[+] Author and Article Information
Namwoo Kang

Cheongpa-ro 47-gil 100, Yongsan-gu Seoul, 04310 Republic of Korea
nwkang@sookmyung.ac.kr

Alparslan Emrah Bayrak

5000 Forbes Ave. Pittsburgh, PA 15221
bayrak@umich.edu

Panos Y. Papalambros

2250 GG Brown Building 2350 HAYWARD Ann Arbor, MI 48109
pyp@umich.edu

1Corresponding author.

ASME doi:10.1115/1.4040629 History: Received November 18, 2017; Revised June 13, 2018

Abstract

Manufacturers must decide when to invest and launch a new vehicle segment or how to redesign vehicles existing segment, both 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 US Corporate Average Fuel Economy (CAFE) standard. In a specific study involving a product of gasoline, hybrid electric, and electric vehicles, 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.

Copyright (c) 2018 by ASME
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