Stepwise Investment and Capacity Sizing under Uncertainty

Michail Chronopoulos (), Verena Hagspiel () and Stein-Erik Fleten
Additional contact information
Verena Hagspiel: Dept. of Industrial Economics and Technology Management, Norwegian University of Science and Technology, Postal: Norwegian University of Science and Technology, Department of Industrial Economics and Technology Management, 7491 Trondheim, Norway, http://www.ntnu.edu/employees/verenaha

No 2015/10, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: The relationship between uncertainty and managerial flexibility is particularly crucial in addressing capital projects. We consider a firm that can invest in a project in either a single (lumpy investment) or multiple stages (stepwise investment) under price uncertainty and has discretion over not only the time of investment but also the size of the project. We confirm that, if the capacity of a project is fixed, then lumpy investment becomes more valuable than a stepwise investment strategy under high price uncertainty. By contrast, if a firm has discretion over capacity, then we show that the stepwise investment strategy always dominates that of lumpy investment. In addition, we show that the total amount of installed capacity under a stepwise investment strategy is always greater than that under lumpy investment.

Keywords: Investment analysis; capacity sizing; flexibility; real options (search for similar items in EconPapers)
JEL-codes: G00 G10 G11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-02-13
New Economics Papers: this item is included in nep-cfn and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Stepwise investment and capacity sizing under uncertainty (2017)
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