Investment planning under uncertainty and flexibility: the case of a purchasable sales contract* |
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Authors: | Oliver Musshoff Norbert Hirschauer |
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Affiliation: | 1. Georg‐August‐Universit?t G?ttingen, Platz der G?ttinger Sieben 5, D‐37073 G?ttingen, Germany;2. Martin‐Luther‐Universit?t Halle‐Wittenberg, Ludwig‐Wucherer‐Str. 2, D‐06108 Halle (Saale), Germany |
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Abstract: | Investment decisions are not only characterised by irreversibility and uncertainty but also by flexibility with regard to the timing of the investment. This paper describes how stochastic simulation can be successfully integrated into a backward recursive programming approach in the context of flexible investment planning. We apply this hybrid approach to a marketing question from primary production which can be viewed as an investment problem: should grain farmers purchase sales contracts which guarantee fixed product prices over the next 10 years? The model results support the conclusion from dynamic investment theory that it is essential to take simultaneously account of uncertainty and flexibility. |
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Keywords: | dynamic programming flexibility investment sales contract stochastic simulation uncertainty |
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