Making the Case for Operational Flexibility and New Manufacturing Technology in the Capital Budgeting Process, 2001 Coating Conference Proceedings

Jürgen Poesche--Innovative paper manufacturing technology has not only meant substantially increased operating speeds, it has also allowed for increased operational flexibility. This competitive strength is based on the installation of new papermaking technology and the size of several new European paper machines producing coated papers. The cash manufacturing costs and delivered cash costs of the woodfree and woodcontaining coated papers for producers in Europe and North America show that the European producers have a strong competitive position. The North American industry can answer this challenge by installing new large-scale paper machines and/or by installing technology rendering the paper machines more flexible. These two approaches are not mutually exclusive. Traditional capital budgeting decision-making tools, e.g., the Net Present Value rule, do not recognize the financial value of operational flexibility, and hence a more sophisticated approach is required. One excellent solution is the evaluation of strategic investments using a Real Options approach.