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When and how much to invest? Investment and capacity choice under product life cycle uncertainty

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  • Lukas, Elmar
  • Spengler, Thomas Stefan
  • Kupfer, Stefan
  • Kieckhäfer, Karsten

Abstract

While empirical research indicates that innovations typically follow a product life cycle that is subject to uncertainty in many industries, endless cash flow growth is still at the heart of most papers guiding investment decisions under uncertainty. This paper studies the effect of an uncertain technological life cycle on the decision to invest in new product introduction, taking into account the combined effects of flexible investment timing and optimal capacity choice. Based on a numerical example referring to investment decisions in facilities for the production of electric vehicle batteries, we find that the optimal investment threshold follows an S-curve over the product life cycle and derive the optimal capacity choice for the given investment decision.

Suggested Citation

  • Lukas, Elmar & Spengler, Thomas Stefan & Kupfer, Stefan & Kieckhäfer, Karsten, 2017. "When and how much to invest? Investment and capacity choice under product life cycle uncertainty," European Journal of Operational Research, Elsevier, vol. 260(3), pages 1105-1114.
  • Handle: RePEc:eee:ejores:v:260:y:2017:i:3:p:1105-1114
    DOI: 10.1016/j.ejor.2017.01.027
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michi Nishihara, 2017. "Valuation of an R&D project with three types of uncertainty," Discussion Papers in Economics and Business 17-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    2. repec:spr:eurjdp:v:6:y:2018:i:1:d:10.1007_s40070-018-0076-5 is not listed on IDEAS

    More about this item

    Keywords

    OR in research and development; Bass model based product life cycle; Electric vehicle battery; Real option; Capacity choice;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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