Optimal investment and production decisions and the value of the firm

We explore the effects of uncertainty on a firm that can respond by modifying its investment or production schedule (or both simultaneously) to variations in output price. Investment may increase capacity and/or reduce costs. We consider a firm with finite resources.Our model uses option theory instead of the more traditional net present value framework. One of the early papers using this approach is Brennan and Schwartz (1985) in which an investment project to extract a finite natural resource is valued. In that paper, the value of the firm is a function of two state variables, the finite resource to be extracted (output to be produced in the future) and the commodity spot price. In order to maximize firm value, the manager can respond by modifying one control variable, the production level. In our model we handle instead three state variables (spot price, resources, accumulated investment) and two control variables (production rate and investment rate), and solve numerically.We obtain both the value and the optimal policy of a firm that has investment projects that increase capacity and/or reduce costs and illustrate optimal policies as resources and available investments decrease over the life of the firm. Firms may start by only investing, then invest and produce, to end only producing.We thank Scott Wo, the referee and the editor for their comments and suggestions. Cortázar and Lowener acknowledge the financial support from FONDECYT and FONDER.     

The Asymptotic Optimality of Residual Income Maximization

Residual income subtracts from operating income an interest charge for invested capital. Residual income can be calculated each period from current accounting information, unlike discounted cash flow (DCF), which requires the knowledge of future cash flows. This paper provides a normative justification for residual-income maximization by showing that if investment decisions are made myopically each period to maximize residual income, the resulting path asymptotically maximizes discounted cash flow. Thus, under the assumptions of the model, residual-income maximization is a heuristic that leads to the long-run DCF-optimum.     

Designing and managing employer-sponsored long-term care plans

Due to prevalent demographic factors, long-term care is an issue of increasing concern to American workers. The cost and time involved in ever-expanding long-term care responsibilities for many employees has resulted in increased indirect employer costs. The authors argue that providing' long-term care as part of the employee benefit plan is an efficient and effective way to manage these increasing costs for both the employer and the employee. The article offers discussion of plan design for long-term care, including issues to be considered and strategy for plan management.     

Using the Internet to achieve purchasing improvements at General Electric.

This article presents a case study of how General Electric's Lighting Division has used the Internet to dramatically improve purchasing and logistics performance. By applying new techniques and technologies, including an Internet-based "Trading Process Network," GE Lighting has achieved substantial benefits, including cycle time reduction, elimination of paper and mail processing, improved information sharing with suppliers, quality improvement, and cost reduction.     

State income tax policy and geographic labour force mobility in the United States

"This study empirically investigates the impact of state income tax policy on U.S. interstate migration [of the labor force] for the period 1985-89. It finds that people vote with their feet and prefer to move so as to minimize their state income tax liabilities."