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| Author: | Biekpe, N. Klumpes, P. Tippett, M. |
| Title: | Analytic solutions for the value of the option to (dis)invest |
| Journal: | R. and D. Management
2001 : VOL. 31:2, p. 149-162 |
| Index terms: | CAPITAL INVESTMENT R&D INVESTMENT |
| Language: | eng |
| Abstract: | It is well known that costly reversibility complicates capital investment analysis to the point where closed form expressions for the value of a firm's investment opportunities seldom exist. In such circumstances numerical evaluation is normally taken as the most practical (and often, the only) way of determining investment value. However, the authors demonstrate that power series expansions can often be used to obtain analytic expressions for the value of a firm's investment opportunities. The authors use them in a research and development (R&D) setting to determine investment value when cash flows are generated by two well known stochastic processes. The first is based on the Cox, Ingersoll and Ross (1985) 'square root' process; the second on the Uhlenbeck and Ornstein (1930) mean reverting random walk. |
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