USING EXPANDED REAL OPTIONS ANALYSIS TO EVALUATE CAPACITY EXPANSION DECISIONS UNDER UNCERTAINTY IN THE CONSTRUCTION MATERIAL INDUSTRY

Authors

  • Amer Mohammad Momani Jordan University of Science and Technology
  • Tarek H. Al-Hawari Jordan University of Science and Technology
  • Rand W Mousa Jordan University of Science and Technology

DOI:

https://doi.org/10.7166/27-2-1381

Keywords:

Construction Material Industry, Capacity Expansion, Real Options Analysis, Monte Carlo Simulation

Abstract

Capacity expansion generally requires large capital expenditure on illiquid assets. Therefore, decisions to enlarge capacity must support the organisation’s strategic objectives and provide valuable input for the budgeting process. This paper applies an expanded form of Real Options Analysis (ROA) to generate and evaluate capacity expansion strategies under uncertainty in the construction material industry. ROA is applied to different expansion strategies associated with different demand scenarios. Evaluating a wider variety of strategies can reduce risk and sponsor decisions that maximise the firm’s value. The case study shows that the execution of a lead expansion strategy with 10-year intervals under a 50 per cent demand satisfaction scenario produces superior results. 

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Author Biographies

Amer Mohammad Momani, Jordan University of Science and Technology

Industrial Engineering-Assistant Professor

Tarek H. Al-Hawari, Jordan University of Science and Technology

Industrial Engineering-Associate Professor

Rand W Mousa, Jordan University of Science and Technology

Industrial Engineering Department- Teaching and research assistant

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Published

2016-08-12

How to Cite

Momani, A. M., Al-Hawari, T. H., & Mousa, R. W. (2016). USING EXPANDED REAL OPTIONS ANALYSIS TO EVALUATE CAPACITY EXPANSION DECISIONS UNDER UNCERTAINTY IN THE CONSTRUCTION MATERIAL INDUSTRY. The South African Journal of Industrial Engineering, 27(2), 1–14. https://doi.org/10.7166/27-2-1381

Issue

Vol. 27 No. 2 (2016)

Section

Feature Articles

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