@techreport{e79e30d8bf354cdeae02f327bd23f381,

title = "Strategic Capital Budgeting: Asset Replacement Under Uncertainty",

abstract = "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.",

keywords = "capital budgeting, uncertainty, investment, game theory",

author = "G. Pawlina and P.M. Kort",

note = "Pagination: 27",

year = "2001",

language = "English",

volume = "2001-4",

series = "CentER Discussion Paper",

publisher = "Finance",

type = "WorkingPaper",

institution = "Finance",

}