Real option analysis for capacity investment planning for semiconductor manufacturing

Abstract

This study aims to propose a real option analysis to evaluate capital investment decisions for capacity expansion under demand uncertainty. Comparing to conventional analysis, this approach can provide a decision framework to incorporate management flexibility and thus provide a better measurement of optional value of capacity investment from potential benefits to avoid capacity shortage and losing growth opportunity. In particular, a binomial model with risk neutral method was employed to illustrate the expansion of the uncertainty event tree and the assessment of option value for supporting top managers' decision flexibility in light of dynamic decision contexts.