Suitable for MBA, EMBA, GEMBA, and executive education programs, this field-based case offers an opportunity to use simulation modeling to evaluate an investment affected by prices, technical success, and yields from raw materials that are all uncertain in a global context. The company produces pitch-based carbon fiber in China. ChinaCarb’s supplier in Europe has discontinued its production, leaving ChinaCarb with only enough raw materials for one year. The supplier is willing to sell its production technology and associated patents to ChinaCarb. Several managers (also investors) want to close the company because they think it is too risky to buy the supplier technology and build the production line in China. The chairman of the company, however, wants to invest in the supplier technology. To resolve the dispute and make a decision, the chairman needs to forecast uncertainties and use a financial model to evaluate the new endeavor to produce the raw material in house. The analysis involves developing a forecast of the stream of prices of the compound used to produce the raw material and incorporating into the evaluation a forecast of technical success with the technology. Risk preference analysis would be used to compare alternatives.
1. Understanding decisions being made by Chinese managers and owners along with the business and political contexts. 2. Using a Monte Carlo simulation of NPV to evaluate a business venture. 3. Predicting future commodity price using (mean-reverting) random walk. 4. Incorporating risk preference utility into the simulation to aid decision making.