Abstract
The objective of this paper is to apply real option analysis to Volkswagen's (VW) business case of introducing the Phaeton model in the upper-class car segment. Although VW traditionally only produced small and medium-sized cars, it started selling the Phaeton in 2002. Here, we look at only the VW brand, not the corporation which would also include Audi, Bentley, Bugatti, Seat, and other brands as well. The decision for this endeavor was taken at the end of the 1990s, when the economic boom led many car manufacturers to believe that the upper-class and luxury class segments would yield substantial growth rates in the future. The analysis in the following paper will be twofold. Firstly, we will take the position of VW as of the end of the 1990s and consider whether the decision to introduce the Phaeton makes good business sense. For this purpose, both a net present value (NPV) analysis and an additional real option valuation (ROV) will be undertaken. As a second step, the results of the real options valuation will be used to derive an advice for VW as of today. It will explain measures regarding the company's continuity with the Phaeton, whose market introduction turned out to be very disappointing. As it will be shown, a pure NPV analysis shows that the Phaeton should not have been introduced. However, this result is not final as it has not take into consideration several other factors.
