Real options-based evaluation model for transformable plant designs in the process industry

Transformable plant designs are emerging in the process industry as an alternative production concept to conventional large-scale plant designs. While transformable plant designs come at the disadvantage of higher costs per unit due to lower scale effects and higher investment costs per capacity unit installed, their major advantage are the flexible choices of capacity, product, and location which allow for quick adjustments to market changes. The value of such flexibility is not captured in traditional methods of investment appraisal such as the net present value method. When using these methods flexible technologies may appear less attractive than they actually are. More recently, the real options approach has been proposed as a tool to value investments in flexible technologies. In this paper we present an evaluation model for the economic assessment of investments in transformable plant designs that is able to capture different kinds of flexibility in a setting with multiple sources of uncertainty. The implementation of the model in two case studies shows that the flexibility value is a significant driver of the overall value of transformable plant designs.