### Abstract

Original language | English |
---|---|

Place of Publication | Tilburg |

Publisher | Finance |

Number of pages | 27 |

Volume | 2001-4 |

Publication status | Published - 2001 |

### Publication series

Name | CentER Discussion Paper |
---|---|

Volume | 2001-4 |

### Fingerprint

### Keywords

- capital budgeting
- uncertainty
- investment
- game theory

### Cite this

*Strategic Capital Budgeting: Asset Replacement Under Uncertainty*. (CentER Discussion Paper; Vol. 2001-4). Tilburg: Finance.

}

**Strategic Capital Budgeting : Asset Replacement Under Uncertainty.** / Pawlina, G.; Kort, P.M.

Research output: Working paper › Discussion paper › Other research output

TY - UNPB

T1 - Strategic Capital Budgeting

T2 - Asset Replacement Under Uncertainty

AU - Pawlina, G.

AU - Kort, P.M.

N1 - Pagination: 27

PY - 2001

Y1 - 2001

N2 - We consider a firm's decision to replace an existing production technology with a new, more cost-efficient one.Kulatilaka and Perotti [1998, Management Science] nd that, in a two-period model, increased product market uncertainty could encourage the firm to invest strategically in the new technology.This paper extends their framework to a continuous-time model which adds flexibility in timing of the investment decision.This flexibility introduces an option value of waiting which increases with uncertainty.In contrast with the two-period model, despite the existence of the strategic option of becoming a market leader due to a lower marginal cost, more uncertainty always increases the expected time to invest.Furthermore, it is shown that under increased uncertainty the probability that the firm finds it optimal to invest within a given time period always decreases for time periods longer than the optimal time to invest in a deterministic case.For smaller time periods there are contrary effects so that the overall impact of increased uncertainty on the probability of investing is in this case ambiguous.

AB - We consider a firm's decision to replace an existing production technology with a new, more cost-efficient one.Kulatilaka and Perotti [1998, Management Science] nd that, in a two-period model, increased product market uncertainty could encourage the firm to invest strategically in the new technology.This paper extends their framework to a continuous-time model which adds flexibility in timing of the investment decision.This flexibility introduces an option value of waiting which increases with uncertainty.In contrast with the two-period model, despite the existence of the strategic option of becoming a market leader due to a lower marginal cost, more uncertainty always increases the expected time to invest.Furthermore, it is shown that under increased uncertainty the probability that the firm finds it optimal to invest within a given time period always decreases for time periods longer than the optimal time to invest in a deterministic case.For smaller time periods there are contrary effects so that the overall impact of increased uncertainty on the probability of investing is in this case ambiguous.

KW - capital budgeting

KW - uncertainty

KW - investment

KW - game theory

M3 - Discussion paper

VL - 2001-4

T3 - CentER Discussion Paper

BT - Strategic Capital Budgeting

PB - Finance

CY - Tilburg

ER -