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Investment and capacity choice under uncertain demand

Dangl, Thomas (1999) Investment and capacity choice under uncertain demand. Report Series SFB "Adaptive Information Systems and Modelling in Economics and Management Science", 32. SFB Adaptive Information Systems and Modelling in Economics and Management Science, WU Vienna University of Economics and Business, Vienna.

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Abstract

This paper extends the real options literature by discussing an investment problem, where a firm has to determine optimal investment timing and optimal capacity choice at the same time under conditions of irreversible investment expenditures and uncertainty in future demand. After the project is installed with a certain maximum capacity, this capacity is fixed as an upper boundary to the output and cannot be adjusted later on. It turns out that, in the framework of this once and for all decision, uncertainty in future demand leads to an increase in optimal installed capacity. But on the other hand it causes investment to be delayed to an extent that even small uncertainty makes waiting and accumulation of further information the optimal decision for large ranges of demand. Limiting the capacity which may be installed weakens this extreme effect of uncertainty. (author's abstract)

Item Type: Paper
Keywords: investment analysis / dynamic programming
Divisions: Departments > Informationsverarbeitung u Prozessmanag. > Produktionsmanagement > Taudes
Departments > Finance, Accounting and Statistics > Statistics and Mathematics
Departments > Marketing > Service Marketing und Tourismus
Departments > Informationsverarbeitung u Prozessmanag. > Informationswirtschaft
Depositing User: Repository Administrator
Date Deposited: 08 Mar 2002 09:45
Last Modified: 26 Jun 2015 04:38
URI: http://epub.wu.ac.at/id/eprint/1422

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