Open AccessModelling and computation of optimal multiple investment timing in multi-stage capacity expansion infrastructure projects
Author(s) -
Jinghuan Li,
Shuhua Zhang,
Yu Li
Publication year - 2022
Publication title -
journal of industrial and management optimization
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.325
H-Index - 32
eISSN - 1553-166X
pISSN - 1547-5816
DOI - 10.3934/jimo.2020154
Subject(s) - cash flow , profit (economics) , mathematical optimization , constraint (computer aided design) , computer science , stage (stratigraphy) , context (archaeology) , investment (military) , operations research , economics , microeconomics , finance , mathematics , biology , paleontology , geometry , politics , political science , law
So far, the optimal investment timing to maximize the total profit of multi-stage capacity expansion infrastructure projects is not clear. In the case of uncertain demands, the optimal multiple stopping time theory is adopted to model the optimal decision-making of investment timing for multi-stage expansion infrastructure projects in a finite time horizon. In this context, the first-stage of the project involves a dedicated asset investment for later expansion, and the capacity of the project at each stage is constrained, which makes the cash flow of the project exhibit the characteristic of bull call spread. The upwind finite difference method and multi-least squares Monte Carlo simulation are combined to solve the project value and determine the optimal exercise boundaries at all stages described by a sequence of demand thresholds. A multi-stage power plant project is taken as an example to validate the model. Through the example, the optimal investment strategies and the value of the multi-stage project are provided; the effects of the dedicated asset and capacity constraint are illustrated. This study novelly reveals the effect of the capacity constraints on the project value using the bull call spread theory.