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Entry And Exit Decisions Under Uncertainty: A Real Option Approach

Author

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  • Nicoleta Vintila

    (Academy of Economic Studies, Bucharest)

Abstract

This paper focuses on models proposed in financial literature for establishing optimum time for entry and exit as strategic decisions for a firm, decisions that can be modeled through real options. Uncertainty refers to price for the product obtained from operating the project, and equally the investment cost. Using as an example a project analyzed by a company from furniture industry, we demonstrate that, under uncertainty, entry in the market takes place at a price level that is much higher than total cost, while decision to exit from the market is adopted when price level is much lower than the variable cost. We also analyze effects of this phenomenon, named hysteresis, when model parameters change.

Suggested Citation

  • Nicoleta Vintila, 2008. "Entry And Exit Decisions Under Uncertainty: A Real Option Approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 11(11(528)(s), pages 341-348, November.
  • Handle: RePEc:agr:journl:v:11(528)(supplement):y:2008:i:11(528)(supplement):p:341-348
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