Journal article
Capital renewal as a real option
European journal of operational research, v 214(1), pp 109-117
01 Oct 2011
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
We consider the timing of replacement of obsolete subsystems within an extensive, complex infrastructure. Such replacement action, known as capital renewal, must balance uncertainty about future profitability against uncertainty about future renewal costs. Treating renewal investments as real options, we derive an optimal solution to the infinite horizon version of this problem and determine the total present value of an institution's capital renewal options. We investigate the sensitivity of the infinite horizon solution to variations in key problem parameters and highlight the system scenarios in which timely renewal activity is most profitable. For finite horizon renewal planning, we show that our solution performs better than a policy of constant periodic renewals if more than two renewal cycles are completed. (C) 2011 Elsevier B.V. All rights reserved.
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Details
- Title
- Capital renewal as a real option
- Creators
- Matthew J. Reindorp - Tech Univ Eindhoven, Dept Ind Engn & Innovat Sci, NL-5600 MB Eindhoven, NetherlandsMichael C. Fu - Univ Maryland, Robert H Smith Sch Business, College Pk, MD 20742 USA
- Publication Details
- European journal of operational research, v 214(1), pp 109-117
- Publisher
- Elsevier
- Number of pages
- 9
- Grant note
- Canadian National Guide to Sustainable Municipal Infrastructure (Public Works Department)
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Decision Sciences (and Management Information Systems)
- Web of Science ID
- WOS:000292433900012
- Scopus ID
- 2-s2.0-79958018257
- Other Identifier
- 991021810214204721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Management
- Operations Research & Management Science