Investment Decisions with Two-Factor Uncertainty

This paper considers investment problems in real options with non-homogeneous two-factor uncertainty. We derive some analytical properties of the resulting optimal stopping problem and present a finite difference algorithm to approximate firm’s value function exercise boundary. An important message our is that frequently applied quasi-analytical approach underestimates impact caused by fact solution does not satisfy partial differential equation governs function. As result, may wrongly advise invest substantial part state space.