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  • Ejor2010

    Rights statement: “NOTICE: this is the author’s version of a work that was accepted for publication in the European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, [202, 1, (2010)] DOI:10.1016/j.ejor.2009.05.027”

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Uncertainty and stepwise investment

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<mark>Journal publication date</mark>1/04/2010
<mark>Journal</mark>European Journal of Operational Research
Issue number1
Volume202
Number of pages8
Pages (from-to)196-203
Publication StatusPublished
<mark>Original language</mark>English

Abstract

We analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points. The presence of economies of scale gives rise to the following trade-off: lumpy investment has a lower total cost, but stepwise investment gives more flexibility by letting the firm choose the timing individually for each stage. Our main question is how uncertainty in market development affects this trade-off. The answer is unambiguous and in contrast with a conventional real-options intuition: higher uncertainty makes the single-stage investment more attractive relative to the more flexible stepwise investment strategy.

Bibliographic note

“NOTICE: this is the author’s version of a work that was accepted for publication in the European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, [202, 1, (2010)] DOI:10.1016/j.ejor.2009.05.027”