Modeling Strategic Investment Decisions Under Sequential Technological Change
Strategic decisions to invest in new equipment are critical not only because of the large initial capital costs incurred but even more importantly because they affect future unit production costs, revenues, and the ability of the firm to perform operations that were not possible earlier. Thus these decisions determine the very competitiveness of the firm. Further, decisions regarding the choice of technology are very expensive to correct if incorrect decisions are identified. These decisions have become increasingly urgent and complex because the state of the art in technology is changing rapidly. However, many models available for evaluating these decisions are either too complex and inefficient or too restrictive in the number, types, and the way appearance of future technologies is modeled. This research attempts to relax some of these restrictions using forecast horizon procedures to model capital investment decisions where any number of technologies may appear in the future with purchase costs and revenues that may vary over time. The appearance of these future technologies are considered uncertain with probabilities that may also vary with time. However, we assume that the order in which they appear is sequential, much like the different generations of microchips for microcomputers. We develop a new approach using nonunique terminal rewards to solve a dynamic programming model of the problem by introducing "converse" difference functions and present an algorithm that is both simple and efficient. Despite the increase in state space from the use of "converse" functions, we show that the computational burden of the algorithm does not increase. Numerical examples are given to illustrate our algorithm. Sensitivity of the optimal decision to changes in probabilities, costs, and revenues are also discussed.
Volume (Year): 41 (1995)
Issue (Month): 2 (February)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:41:y:1995:i:2:p:282-297. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.