Engineering Economic Valuation of Set Design for Transportation Vehicles under Fuel Cost Volatility

摘要

Given the current level of volatility in fuel cost, when the fuel cost is sufficiently high, then the transportation vehicles may be retrofitted with fuel saving devices such as winglets for airplanes. For this retrofitting, we say the vehicle design is a set design. In addition, such transportation vehicles face the end-of-life decisions (i.e., the decommissioning). This paper aims to solve for the optimal time to retrofit and to decommission a vehicle of set design under the fuel cost uncertainty. Assuming that the fuel cost follows a geometric Brownian motion (GBM) process, we use the stochastic optimal control theory to valuate such a design, and to determine the optimal threshold of fuel cost to retrofit the fuel saving devices and to decommission such a transportation vehicle, and obtain the closed-form solutions for the optimal thresholds as well as the corresponding expected life for operations. Through sensitivity analysis and a numerical study on the winglets of airplanes, we derive the managerial insights and economic implications.