Finite Project Life and Uncertainty Effects on Investment

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

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Uncertainty
Investment project
Real options
Investment under uncertainty

Keywords

  • investment
  • uncertainty
  • finite project length

Cite this

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

Finite Project Life and Uncertainty Effects on Investment. / Gryglewicz, S.; Huisman, K.J.M.; Kort, P.M.

Tilburg : Finance, 2006. (CentER Discussion Paper; Vol. 2006-124).

Research output: Working paperDiscussion paperOther research output

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T1 - Finite Project Life and Uncertainty Effects on Investment

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N2 - 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.

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KW - investment

KW - uncertainty

KW - finite project length

M3 - Discussion paper

VL - 2006-124

T3 - CentER Discussion Paper

BT - Finite Project Life and Uncertainty Effects on Investment

PB - Finance

CY - Tilburg

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Gryglewicz S, Huisman KJM, Kort PM. Finite Project Life and Uncertainty Effects on Investment. Tilburg: Finance. 2006. (CentER Discussion Paper).