Engineering Economic Valuation of Ready-Made Design for Transportation Vehicles

Abstract

<p>Nowadays, transportation vehicles are upfront equipped with fuel saving devices such as winglets in airplanes so as to reduce fuel consumption. By ready-made design, we mean this approaching of equipping upfront on transportation vehicles. In this article, under the reasonable assumption that the fuel cost is volatile and follows a geometric Brownian motion (GBM) process, we use the theory of stochastic optimal control (1) to determine the threshold of fuel cost to decommission such a transportation vehicle, and (2) to determine the engineering economic valuation of such a design. For the threshold and the valuation, we proceed to obtain the analytical solutions to our approach, followed by sensitivity analyses as well as the derivation of the total expected operation lifetime until decommissioning. Finally, for the managerial insights and economic implications, we present an extensive numerical example with numerous empirical data sets from publicly available sources. For instance, as the fuel cost becomes more uncertain, economically rational decision makers will defer the decommissioning of a vehicle.</p>