Real option analysis for capacity investment planning for semiconductor manufacturing

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.