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Investing in Time-to-Build Projects With Uncertain Revenues and Costs: A Real Options Approach
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, U.K.; HEC Montréal, Canada.
2018 (English)In: IEEE transactions on engineering management, ISSN 0018-9391, E-ISSN 1558-0040, Vol. 65, no 3, p. 448-459Article in journal (Refereed) Published
Abstract [en]

Lagging public-sector investment in infrastructure and the deregulation of many industries mean that the private sector has to make decisions under multiple sources of uncertainty. We analyze such investment decisions by accounting for both multiple sources of uncertainty and the time-to-build aspect. The latter feature arises in the energy and transportation sectors, because investors can decide the rate at which the project is completed. Furthermore, two explicit sources of uncertainty represent the discounted cash inflows and outflows of the completed project. We use a finite-difference scheme to solve numerically the option value and the optimal investment threshold. Somewhat counterintuitively, with a relatively long time to build, a reduction in the growth rate of the discounted operating cost may actually lower the investment threshold. This is contrary to the outcome when the stepwise aspect is ignored in a model with uncertain price and cost. Hence, research and development efforts to enhance emerging technologies may be more relevant for infrastructure projects with long lead times.

Place, publisher, year, edition, pages
2018. Vol. 65, no 3, p. 448-459
Keywords [en]
Investment lags, real options, technology management
National Category
Information Systems, Social aspects
Research subject
Computer and Systems Sciences
Identifiers
URN: urn:nbn:se:su:diva-156826DOI: 10.1109/TEM.2018.2803304ISI: 000439383600009OAI: oai:DiVA.org:su-156826DiVA, id: diva2:1211187
Available from: 2018-05-30 Created: 2018-05-30 Last updated: 2018-08-20Bibliographically approved

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