Real options and their use in evaluating
capital investments
by
John R. Birge
Dean
McCormick School of Engineering and Applied Science
Northwestern University
Evanston, IL 60208
Wednesday, October 20, 1999
1:25 - 2:15 p.m.
Room 108 ME
Broadcast on UNITE Channel A
Coffee will be available in 152 ME following the seminar
Investment in R&D and new technology requires
an evaluation of highly uncertain potential returns. Traditional
net present value or rate of return analyses do not capture the
option value of these investments. The result of these failed
analyses is lost value and, often in high-tech industry, firm
failure. Financial option valuation methods can, however, address
these problems. Several high-tech firms have, in fact, adopted
this methodology, call real option evaluation, and have made successful
investments in products that would not have been supported under
traditional analyses. In this talk, we will describe the real
option methodology and its use in determining optimal capacity
and new product investments.
John R. Birge received his M.S. and Ph.D. degrees
from Stanford University in Operations Research. His A.B. is from
Princeton University in Mathematics. In September 1999, he became
Dean of the McCormick School of Engineering and Applied Science
and Professor of Industrial Engineering and Management Sciences
at Northwestern University. Previous to this appointment, he was
Professor and Chair of Industrial and Operations Engineering at
the University of Michigan where he had been since 1980. He also
established the University of Michigan Financial Engineering Program
and was chair from its inception in 1997 until 1999. He has held
visiting appointments at the International Institute for Applied
Systems Analysis in Vienna, Austria, the Naval Postgraduate School
in Monterey, California, the University of New South Wales in
Sydney, Australia, and Dalhousie University in Halifax, Nova Scotia.
Professor Birge's work considers the engineering of practical
systems in which some outcomes are not completely known before
decisions must be made. He focuses on methods for making decisions
that must be implemented sequentially over time. His research
concerns the modeling of these systems to obtain robust decisions
that are not just optimal for a single criterion but that respond
favorably to whatever outcomes occur. In particular, he has developed
methods for optimal asset and liability allocations over time,
efficient periodic scheduling of workers and machines, productive
power and energy distribution, and effective allocation of public
services. In finance, his work centers on uses of low discrepancy
sequences for option pricing, real options for capacity decisions,
and asset/liability management. Professor Birge has worked for
and been a consultant to a number of companies including General
Motors, Chrysler Corporation, Volkswagen, Detroit Edison, Herman
Miller, TRW, Schlumberger, the Michigan State Senate and the Michigan
State Police Troopers Association. In addition to these activities,
he has held grants from the National Science Foundation (NSF),
the National Institute of Justice, the Electric Power Research
Institute (EPRI), and the Office of Naval Research. Professor
Birge is Editor-in-Chief of Mathematical Programming, Series B.
He also serves on the editorial boards of Mathematical Programming,
Series A, SIAM Journal on Optimization, Computational Optimization
and Applications, America Journal of Mathematical and Management
sciences, and the International Journal of Operations Management.
He chaired the Fifth International Conference on Stochastic Programming
in 1989 and the XV International Symposium on Mathematical Programming
in 1994. In 1986, he was selected as an Office of Naval Research
Young Investigator. From 1993-1994, he served as Vice-Chair of
the University of Michigan Senate Assembly. He served as Vice
President-Subdivisions and is currently President-Elect of the
Institute for Operations Research and Management Science (INFORMS).
He is author of over fifty publications in a variety of journals.
Informal Faculty Luncheon: Wednesday,
October 20, 1999, 11:45 am, Room 402, Campus Club. Dean John Birge
will be able to attend.
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