ENTRY AND EXIT DECISIONS UNDER UNCERTAINTY: A REAL OPTION APPROACH

Nicoleta Vintilă

Theoretical and Applied Economics, 2008, vol. 11(528)(supplement), issue 11(528)(supplement), 341-348

Abstract: This paper focuses on models proposed in financial literature for establishing optimum time for entry and exit as strategic decisions for a firm, decisions that can be modeled through real options. Uncertainty refers to price for the product obtained from operating the project, and equally the investment cost. Using as an example a project analyzed by a company from furniture industry, we demonstrate that, under uncertainty, entry in the market takes place at a price level that is much higher than total cost, while decision to exit from the market is adopted when price level is much lower than the variable cost. We also analyze effects of this phenomenon, named hysteresis, when model parameters change.

Keywords: capital budgeting; uncertainty; entry options; exit options; hysteresis. (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:agr:journl:v:11(528)(supplement):y:2008:i:11(528)(supplement):p:341-348

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