Real options approach for technology renewal in an Electronic Manufacturing Service (EMS) company
Journal Title: International Journal of Applied Research in Management and Economics - Year 2022, Vol 5, Issue 3
Abstract
Electronic Manufacturing Services (EMS.) companies are in a highly competitive environment where investment in technology plays a significant role in the company's performance. The equipment efficiency is directly converted to revenue. The equipment efficiency decays over time; keeping the equipment represents a loss in productivity, and renewing the equipment requires an additional cost. There is a continuous decision process to determine the optimal time to replace the old equipment with a new one. Traditionally, the optimal time to renew is when the machine's revenue matches the cost. This paper studies the renewal decision using a real options approach, adding the uncertainty factor. The variables are modeled as Geometric Brownian Motions. We provide a literature review of renewal real options and describe the models we use. The one-factor model considers the revenue as stochastic; the two-factor model considers the revenue and cost as stochastic; the technological improvement models extend the two-factor model to include a premium in revenue for replacing the equipment. An overview of the electronic manufacturing dynamics is described; we select a product whose manufacturing process depends on machines. We provide a methodology for the model's implementation and how to determine the parameters; the results are compared to the deterministic approach. Finally, we discuss the models' advantages, disadvantages, and limitations.
Authors and Affiliations
Jose Mario Zarate Carbajal,Riemann Ruiz-Cruz,Juan Diego Sanchez-Torres,
Keywords
Related Articles
- EP ID EP745370
- DOI -
- Views 1
- Downloads 0
The Impact of External Communication Strategy on Blockchain Startups: Analysing the Case of Credits Blockchain Platform
Communication is always an important part of establishing a businessâ sense of direction and growth; information needs to be accessed by the receiver in an appropriate way and put across in a clear, impactful and engag...
Correlation of European and U.S. Technology and Financial Stocks during COVID-19 Pandemic
In 2022 stock markets around the world lost some of their value, led by high-growth sectors, sectors that tend to show a significantly higher growth rate than the average market. At the same time the financial sector sho...
Financial Innovations, The Evaluation of Their Application in Southeastern Europe: The Case of The Republic of Moldova
Financial innovations are an invaluable element in the framework of knowledge economy. FinTech has already become a must-have for most countries in the world. These innovations represent a reformative element of the curr...
Holistic leader: discussing the emerging challenges
In today's environment the leader is already faced with changes in the status quo of the field of work. Changes such as automation and digitization of work, changing forms of employment and the constant demand for furthe...
Assessment of Educational Service Quality at Masterâs level in an Iranian university using based on HEdPERF Model
The aim of this research was to examine the quality of education service at the masterâs level in the Islamic Azad University of Dezful. In terms of objective, this is an applied research and in regard to methodology,...