Finite Project Life and Uncertainty Effects on Investment

S. Gryglewicz, K.J.M. Huisman, P.M. Kort

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Abstract

This paper revisits the important result of the real options approach to investment under uncertainty, which states that increased uncertainty raises the value of waiting and thus decelerates investment.Typically in this literature projects are assumed to be perpetual.However, in today.s economy .rms face a fast-changing technology environment, implying that investment projects are usually considered to have a .nite life.The present paper studies investment projects with .nite project life, and we .nd that, in contrast with the existing theory, investments may be accelerated by increased uncertainty.It is shown that this particularly happens when uncertainty is limited and project life is short.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages23
Volume2006-124
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-124

Keywords

  • investment
  • uncertainty
  • finite project length

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    Gryglewicz, S., Huisman, K. J. M., & Kort, P. M. (2006). Finite Project Life and Uncertainty Effects on Investment. (CentER Discussion Paper; Vol. 2006-124). Finance.