Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment
Why are some regions preferred when investors consider irreversible investment? This study offers an explanation to this question and suggests improvements that will assist disadvantaged regions improve on their bid for funds. The paper considers irreversible investment under uncertainty when instal...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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Croatian Operational Research Society
2021-01-01
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| Series: | Croatian Operational Research Review |
| Subjects: | |
| Online Access: | https://hrcak.srce.hr/file/377388 |
| _version_ | 1797206959846326272 |
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| author | Sunday Ewansiha Omosigho Esosa Enoyoze Virtue U. Ekhosuehi |
| author_facet | Sunday Ewansiha Omosigho Esosa Enoyoze Virtue U. Ekhosuehi |
| author_sort | Sunday Ewansiha Omosigho |
| collection | DOAJ |
| description | Why are some regions preferred when investors consider irreversible investment? This study offers an explanation to this question and suggests improvements that will assist disadvantaged regions improve on their bid for funds. The paper considers irreversible investment under uncertainty when installed capacity utilization is incorporated. We develop a normative model for irreversible investment problem under uncertainty using real options approach. Capacity utilization was not a major consideration by previous authors who assumed that installed capacity would be fully utilized.
Variations in capacity utilization may be attributed to disruption in input supply or infrastructural bottlenecks that limit firms to get their products to customers. This study modifies the geometric Brownian motion for the value of a project to account for capacity utilization in the derivation of irreversible investment decision rule. The proposed model provides a theoretical explanation of how utilization affects irreversible investment decisions. Data on petroleum refinery margins is used to illustrate application of the proposed model to refinery investment. The study reveals that capacity utilization has an inverse effect on the investment trigger, and so, links irreversible investment decisions to plant utilization. We recommend optimal utilization of installed plant capacity for regions seeking funds for irreversible investment. |
| first_indexed | 2024-04-24T09:15:18Z |
| format | Article |
| id | doaj.art-daa76ddcbd02425d8b39ab81c2ab5c93 |
| institution | Directory Open Access Journal |
| issn | 1848-0225 1848-9931 |
| language | English |
| last_indexed | 2024-04-24T09:15:18Z |
| publishDate | 2021-01-01 |
| publisher | Croatian Operational Research Society |
| record_format | Article |
| series | Croatian Operational Research Review |
| spelling | doaj.art-daa76ddcbd02425d8b39ab81c2ab5c932024-04-15T17:00:56ZengCroatian Operational Research SocietyCroatian Operational Research Review1848-02251848-99312021-01-01121495910.17535/crorr.2021.0005Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery InvestmentSunday Ewansiha Omosigho0Esosa Enoyoze1Virtue U. Ekhosuehi2Department of Mathematics, University of BeninDepartment of Mathematics/ICT, Edo State UniversityDepartment of Statistics, University of BeninWhy are some regions preferred when investors consider irreversible investment? This study offers an explanation to this question and suggests improvements that will assist disadvantaged regions improve on their bid for funds. The paper considers irreversible investment under uncertainty when installed capacity utilization is incorporated. We develop a normative model for irreversible investment problem under uncertainty using real options approach. Capacity utilization was not a major consideration by previous authors who assumed that installed capacity would be fully utilized. Variations in capacity utilization may be attributed to disruption in input supply or infrastructural bottlenecks that limit firms to get their products to customers. This study modifies the geometric Brownian motion for the value of a project to account for capacity utilization in the derivation of irreversible investment decision rule. The proposed model provides a theoretical explanation of how utilization affects irreversible investment decisions. Data on petroleum refinery margins is used to illustrate application of the proposed model to refinery investment. The study reveals that capacity utilization has an inverse effect on the investment trigger, and so, links irreversible investment decisions to plant utilization. We recommend optimal utilization of installed plant capacity for regions seeking funds for irreversible investment.https://hrcak.srce.hr/file/377388geometric Brownian motionirreversible investmentplant capacity utilizationpetroleum refinery investmentreal options |
| spellingShingle | Sunday Ewansiha Omosigho Esosa Enoyoze Virtue U. Ekhosuehi Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment Croatian Operational Research Review geometric Brownian motion irreversible investment plant capacity utilization petroleum refinery investment real options |
| title | Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment |
| title_full | Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment |
| title_fullStr | Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment |
| title_full_unstemmed | Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment |
| title_short | Impact of Plant Utilization on Irreversible Investment Under Uncertainty with Application to Refinery Investment |
| title_sort | impact of plant utilization on irreversible investment under uncertainty with application to refinery investment |
| topic | geometric Brownian motion irreversible investment plant capacity utilization petroleum refinery investment real options |
| url | https://hrcak.srce.hr/file/377388 |
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