Replacement Investment: Optimal Economic Life Under Uncertainty

Ian M. Dobbs

Journal of Business Finance & Accounting, 2004, vol. 31, issue 5‐6, 729-757

Abstract: Replacement investment is essentially a regenerative optimal stopping problem; that is, the key decision concerns when to terminate the life of existing plant – and hence when to start over again. This paper examines this optimisation problem within a continuous time framework and studies the qualitative and quantitative impact of uncertainty on the timing of new investment (and the criteria that should be used for terminating the life of existing plant).

Date: 2004
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