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Optimal proportion decision-making for two stages investment

Author

Listed:
  • Liu, Yu-Hong
  • Jiang, I-Ming
Abstract
In two-stage investment decision-making, an enterprise focuses not only on the choice of optimal investment timing, but also on the investment proportion of each stage. By considering the typical two-stage investment decision-making, we analyze the effect of output quantity on price and profit of each stage and construct the model under uncertainty, including the optimal investment timing and proportion. In some situations the investment project is set up with a certain maximum capacity, and this fixed project capacity becomes an upper boundary of its later output that cannot be adjusted in the future. Compared to lumpy investment, this study presents that two-stage investment decision-making allows the enterprise to enter the first stage earlier and the second stage later when choosing the proper investment proportion, which may enhance the investment value. Under increasing uncertainty, the enterprise will enter the first-stage investment later with a larger proportion, and the effect from the change in investment proportion on investment value will decrease.

Suggested Citation

  • Liu, Yu-Hong & Jiang, I-Ming, 2019. "Optimal proportion decision-making for two stages investment," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 776-785.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:776-785
    DOI: 10.1016/j.najef.2018.08.002
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    More about this item

    Keywords

    Real option; Sequential investment; Investment proportion;
    All these keywords.

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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