Determine the value of investment options

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ASML, a Dutch company founded as a spin-off from Philips, is the world's largest supplier of photolithography systems for the semiconductor industry. In order to meet increasing expected future demand, management is considering to build a new production line. However, the market for its products is highly volatile and building a new production line takes about two years. First, the building itself needs to be built (the "shell"), which takes a year. Then the production line needs to be designed, installed, tested, etc., which takes another year. A consultant with some experience of real options has suggested to management that value can be created by killing off some of the flexibility and build the shell straightaway, while leaving the option to install the production line open. Use your knowledge about real options valuation to discuss the effect of construction delay on the value of investment options and to comment on why the consultant may be right in seeing that reducing flexibility may, in this case, increase value.

Reference no: EM132909707

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