A financial model of the valuation of advanced manufacturing technology

Manufacturing technologies that provide flexibility to the firm are value enhancing in an uncertain environment. Traditional capital budgeting techniques are criticized for their inability to value such technologies. Other methods were proposed but they remain unsuccessful.;This research proposes a more intuitive and practicable alternative. We used the financial options framework to model manufacturing flexibility. Volume, expansion and product (& production) flexibilities are incorporated in our model for proper valuation of these instruments responsiveness to uncertainty. The model is a blueprint for valuing flexible manufacturing systems (FMS).;We studied the behavior of a generic FMS under changes of the variance of returns of the project and changes in the risk free rate. The results show that manufacturing flexibility is in fact value enhancing when demand is uncertain. Also, we show that both discounting cash flows and valuing uncertainty opportunities are important to investment project value.