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Replacement Investment: Optimal Economic Life Under Uncertainty
Author(s) -
Dobbs Ian M.
Publication year - 2004
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2004.00555.x
Subject(s) - investment (military) , key (lock) , investment decisions , economics , optimal stopping , investment strategy , operations research , risk analysis (engineering) , actuarial science , computer science , microeconomics , business , engineering , financial economics , production (economics) , profit (economics) , computer security , politics , political science , law
Replacement investment is essentially a regenerative optimal stopping problem; that is, the key decision concerns when to terminate the life of existing plant – and hence when to start over again. This paper examines this optimisation problem within a continuous time framework and studies the qualitative and quantitative impact of uncertainty on the timing of new investment (and the criteria that should be used for terminating the life of existing plant).