A modified model in evaluation of an investment project in a widget factory

This paper presents a dynamic asset pricing method to evaluate an investment project of a factory construction considering timing of investment and option to abandon production simultaneously when the investor is risk neutral. The factory produces a widget after construction with the market price governed by Geometric Brownian motion. There is a fixed cost of constructing and while building factory or producing the widget regarding the changes in the selling price of the widget, we have the option to abandon the course of current work to avoid further losses. These options are valuable in evaluating investment projects. The researchers showed how these options interact to affect investment decisions and obtained optimal decision rules for this case under this assumption that there exists a complete market.

Keywords:

real option analysis , dynamic asset pricing , investment decisions , Stochastic Dynamic Programming