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When and how much to invest? Investment and capacity choice under product life cycle uncertainty

Elmar Lukas, Thomas Stefan Spengler, Stefan Kupfer and Karsten Kieckhäfer

European Journal of Operational Research, 2017, vol. 260, issue 3, 1105-1114

Abstract: While empirical research indicates that innovations typically follow a product life cycle that is subject to uncertainty in many industries, endless cash flow growth is still at the heart of most papers guiding investment decisions under uncertainty. This paper studies the effect of an uncertain technological life cycle on the decision to invest in new product introduction, taking into account the combined effects of flexible investment timing and optimal capacity choice. Based on a numerical example referring to investment decisions in facilities for the production of electric vehicle batteries, we find that the optimal investment threshold follows an S-curve over the product life cycle and derive the optimal capacity choice for the given investment decision.

Keywords: OR in research and development; Bass model based product life cycle; Electric vehicle battery; Real option; Capacity choice (search for similar items in EconPapers)
JEL-codes: G32 O32 D24 C61 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ejores:v:260:y:2017:i:3:p:1105-1114