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

Authors
Kang, NamwooBayrak, Alparslan EmrahPapalambros, Panos Y.
Issue Date
Oct-2018
Publisher
ASME
Citation
JOURNAL OF MECHANICAL DESIGN, v.140, no.10
Journal Title
JOURNAL OF MECHANICAL DESIGN
Volume
140
Number
10
URI
https://scholarworks.sookmyung.ac.kr/handle/2020.sw.sookmyung/4236
DOI
10.1115/1.4040629
ISSN
1050-0472
Abstract
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 tune 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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