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Uncertain outlays in time‐to‐build problems
Author(s) -
Ott Steven H.,
Thompson Howard E.
Publication year - 1996
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/(sici)1099-1468(199601)17:1<1::aid-mde732>3.0.co;2-n
Subject(s) - investment (military) , value (mathematics) , economics , term (time) , option value , microeconomics , incentive , mathematics , statistics , physics , quantum mechanics , politics , political science , law
In this paper we analyze investment projects in which there is uncertainty in the total investment cost in addition to uncertainty in the completed project value. We deal with an uncertain time‐to‐build. Uncertainties in investment cost are quite common in long‐term, large‐scale, path‐breaking undertakings such as some R&D projects. We find that the inclusion of uncertainty in investment cost tends to mitigate the impacts of the uncertainty of completed project value. The implications of the results are significant. First, when uncertainty of investment cost is ignored, the value of the project is underestimated and a tendency toward underinvestment will result; and second, the existence of uncertainty in investment cost will cause long‐term projects to require larger declines in value before discontinuation of investment should occur.