Strategic Capital Budgeting: Asset Replacement under Market Uncertainty∗
نویسندگان
چکیده
In this paper the impact of product market uncertainty on the optimal replacement timing of a production facility is studied. The existing production facility can be replaced by a technologically more advanced and thus more cost-effective one. We take into account strategic interactions among the firms competing in the product market by analyzing the problem in a duopolistic setting. We calculate the value of each firm and show that i) a preemptive (simultaneous) replacement occurs when the associated sunk cost is low (high), ii) despite the preemption effect uncertainty always raises the expected time to replace, and iii) the relationship between the probability of optimal replacement within a given time interval and uncertainty is decreasing for long time intervals and humped for short time intervals. Furthermore it is shown that result ii) carries over to the case where firms have to decide about starting production rather than about replacing existing
منابع مشابه
Strategic Capital Budgeting : Asset Replacement under Uncertainty
We consider a ...rm’s decision to replace an existing production technology with a new, more cost-e¢cient one. Kulatilaka and Perotti [1998, Management Science ] ...nd that, in a two-period model, increased product market uncertainty could encourage the ...rm to invest strategically in the new technology. This paper extends their framework to a continuous-time model which adds ‡exibility in tim...
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