Flexible manufacturing systems evaluation: An alternative approach

The purpose of this article is to integrate the von Neumann-Morgenstern theory of utility functions and the mean-variance approach to portfolio analysis within the computational framework of selecting a production technology to replace an existing one. A stochastic static one-period problem is formulated, and a measure that takes into account both the capital costs of implementing the new technology and the random monetary value of its output is identified to solve the problem. The properties of this measure are discussed particularly with reference to the optimal selection decision. An example is described to illustrate the methodology.