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The value of capacity sizing under risk aversion and operational flexibility
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, UK.
2013 (English)In: IEEE transactions on engineering management, ISSN 0018-9391, Vol. 60, no 2, 272-288 p.Article in journal (Refereed) Published
Abstract [en]

Risk aversion typically erodes the value of an investment opportunity, often increasing the incentive to delay investment. Although this may be true when the decision maker has discretion only over the timing of investment, any additional discretion over the capacity of a project may lead to different results. In this paper, we extend the traditional real options approach by allowing for discretion over capacity while incorporating risk aversion and operational flexibility in the form of suspension and resumption options. In contrast to a project without scalable capacity, we find that increased risk aversion may actually facilitate investment because it decreases the optimal capacity of the project. Finally, we illustrate how the relative loss in the value of the investment opportunity due to an incorrect capacity choice may become less pronounced with increasing risk aversion and uncertainty.

Place, publisher, year, edition, pages
2013. Vol. 60, no 2, 272-288 p.
Keyword [en]
Capacity sizing, energy sector, real options, risk aversion
National Category
Information Systems
Research subject
Computer and Systems Sciences
URN: urn:nbn:se:su:diva-82269DOI: 10.1109/TEM.2012.2211363ISI: 000318161400007OAI: diva2:567246
Available from: 2012-11-12 Created: 2012-11-12 Last updated: 2014-02-10Bibliographically approved

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Siddiqui, Afzal
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