IRREVERSIBLE INVESTMENT, OPERATING FLEXIBILITY, AND TIME LAGS

Ryuta Takashima (), Makoto Goto () and Motoh Tsujimura ()
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Ryuta Takashima: Department of Risk Science in Finance and Management, Chiba Institute of Technology, 2-17-1 Tsudanuma, Narashino-shi, Chiba 275-0016, Japan
Makoto Goto: Graduate School of Economics and Business Administration, Hokkaido University, Kita 9, Nishi 7, Kita-ku, Sapporo 060-0809, Japan
Motoh Tsujimura: Faculty of Economics, Ryukoku University, 67 Tsukamoto-cho, Fukakusa Fushimi-ku, Kyoto 612–8577, Japan

Asia-Pacific Journal of Operational Research (APJOR), 2010, vol. 27, issue 02, 271-286

Abstract: We consider an optimal investment problem when a firm such as an electric power company has the operational flexibility to expand and contract capacity with fixed cost. This problem is formulated as an impulse control problem combined with optimal stopping. Consequently, we obtain optimal investment timing, optimal capacity expansion and contraction timing, and the investment value. We also show investment, capacity expansion and contraction rule are influenced by the price volatility and the initial capacity is also influenced by the ratio between base-load plant and peak-load plant. In addition, we investigate how time lag between investment and operation influences the investment rule.

Keywords: Real options; investment and operation under uncertainty; time lag (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0217595910002685

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