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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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Uncertainty and stepwise investment
AU - Kort, Peter M
AU - Murto, Pauli
AU - Pawlina, Grzegorz
N1 - “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”
PY - 2010/4/1
Y1 - 2010/4/1
N2 - 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.
AB - 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.
KW - Investment analysis
KW - Real options
KW - Capital budgeting
KW - Project flexibility
KW - Dynamic programming
U2 - 10.1016/j.ejor.2009.05.027
DO - 10.1016/j.ejor.2009.05.027
M3 - Journal article
VL - 202
SP - 196
EP - 203
JO - European Journal of Operational Research
JF - European Journal of Operational Research
SN - 0377-2217
IS - 1
ER -