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- Title
IRREVERSIBLE INVESTMENT, OPERATING FLEXIBILITY, AND TIME LAGS.
- Authors
Takashima, Ryuta; Goto, Makoto; Tsujimura, Motoh
- 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.
- Subjects
REAL options (Finance); OVERHEAD costs; SAVINGS; TIME &; economic reactions; ENERGY industries
- Publication
Asia-Pacific Journal of Operational Research, 2010, Vol 27, Issue 2, p271
- ISSN
0217-5959
- Publication type
Article
- DOI
10.1142/S0217595910002685