Optimal replacement policies for an uncertain rejuvenated asset

Sarah Stutzman, Brandon Weiland, Paul Preckel () and Michael Wetzstein

International Journal of Production Economics, 2017, vol. 185, issue C, 21-33

Abstract: A theory of asset replacement is developed to determine the optimal timing and feasible conditions to first rejuvenate and then to replace an asset. The theoretical underpinnings mate two strands of research: asset rejuvenation and real options. With the aid of comparative statistics and numerical analysis, results are linked across deterministic and stochastic costs and matched with conventional asset replacement (no rejuvenation). The theoretical model is operationalized by applying numerical analysis to the decisions of whether to rejuvenate an aging coal-fired electricity plant and then decommission, or to simply decommission. In addition, the optimal timing of potential rejuvenation and decommission are addressed. Co-firing coal with wood pellets is considered as the rejuvenating process. In this context, it is the relative difference in virgin (coal) versus rejuvenation (co-firing) initial costs and cost growth rates that determines timing and length of time the rejuvenated plant is operated.

Keywords: Asset replacement; Coal; Real options; Wood pellets (search for similar items in EconPapers)
JEL-codes: G11 Q42 Q54 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:185:y:2017:i:c:p:21-33

DOI: 10.1016/j.ijpe.2016.12.018

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