Value of more sophistication : capital investment decision-making with competitive dynamics in the mining industry
Name
903648114-MIT.pdf
Description
Full printable version
Size
13.68 MB
Format
Adobe PDF
Checksum (MD5)
a79db5e5b197b7434a3f5638d3c4c562
Author(s)
Li, Yuanjian Carla
Advisor(s)
Frank R. Field, III, Randolph Kirchain and Richard Roth.
Alternative Title
Capital investment decision-making with competitive dynamics in the mining industry
Date Issued
2014
Publisher
Massachusetts Institute of Technology
Abstract
In many mining markets, one of the central business planning decisions faced by firms is where, when, and by how much to expand their production capacity. Appropriate investment planning methodology is important to both the mining industry and the wider economy. Currently, new mine investment decisions are most often based on the classic project evaluation methodology of discounted cash flow analysis (DCF) applied to the individual potential projects, which is flawed in its inadequate consideration of risk and flexibility, of impact on the profit of the firm, and of competitive dynamics in oligopoly markets. More sophisticated methods that account for these complexities have been proposed in academic literature; however, their value in realistic market settings has been little demonstrated in past literature and they are rarely adopted in practice. This thesis compares four investment decision paradigms of increasing scope and complexity in a three-firm mineral commodity market, based primarily on the firm-level cash flow NPV outcome in Monte Carlo simulations of the market. The analysis is conducted for various market scenarios of different demand growth patterns, volatility, demand elasticity, and supply structure. Simulation results show that in almost all scenarios, the game theoretic and option-based best-firm-NPV policies outperform the positive-mine-NPV policy substantially for all firms, regardless their market and cost position. However, the difference between the best-firm-NPV policy and the positive-firm-NPV policy is often small, depending on the scenario. Overall, the evaluation conducted in this thesis contributes to our understanding of how useful having more sophisticated investment decision methods might be to the firms and under what market conditions.
Description
Thesis: S.M. in Technology and Policy, Massachusetts Institute of Technology, Engineering Systems Division, 2014.
Cataloged from PDF version of thesis.
Includes bibliographical references (pages 119-122).
Subjects
Engineering Systems Division.
Technology, Management, and Policy Program.
MIT Department
Massachusetts Institute of Technology. Engineering Systems Division
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