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Optimal proportion decision-making for two stages investment

Yu-Hong Liu and I-Ming Jiang

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 776-785

Abstract: In two-stage investment decision-making, an enterprise focuses not only on the choice of optimal investment timing, but also on the investment proportion of each stage. By considering the typical two-stage investment decision-making, we analyze the effect of output quantity on price and profit of each stage and construct the model under uncertainty, including the optimal investment timing and proportion. In some situations the investment project is set up with a certain maximum capacity, and this fixed project capacity becomes an upper boundary of its later output that cannot be adjusted in the future. Compared to lumpy investment, this study presents that two-stage investment decision-making allows the enterprise to enter the first stage earlier and the second stage later when choosing the proper investment proportion, which may enhance the investment value. Under increasing uncertainty, the enterprise will enter the first-stage investment later with a larger proportion, and the effect from the change in investment proportion on investment value will decrease.

Keywords: Real option; Sequential investment; Investment proportion (search for similar items in EconPapers)
JEL-codes: C41 C61 G11 G31 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:776-785