Part I. Introduction
I A New View oflnvestment 3
I The Orthodox Thcory 4
2 The Option Approach 6
3 Irrcvcrsibility and the Ability to W:iit 8
4 An Ovcrvicw of the Book 10
5 NoncconomicApplications 23
2 Developing the Concepts'rhrough Simple Examples 26
I Pricc Unccrtainty Lasting Two Pcriocls 27
2 Extencling the Examplc to Thrce Periods 41
3 Uncertaintv over Cost 46
4 Uncertainty over Interest Ratcs 48
5 Scale versus Flcxibiliry 51
6 Guide to the Litcrature 54
Part II. NIathematical Background
3 Stochastic Processes and lto's Lemma 59
1 Stochastic Processes 60
2 The Wiener Process 63
3 Generalized Brownian Motion-Ito Processes 70
4 Ito's Lcmma 79
5 Barriers ancl Long-Run Disrribution S3
6 Jump Processes S-5
7 Guide to the Literature 87
Appendix-The Kolmogorov Equations . 88
4 Dynamic Optimizatic)n under Uncertainty 93
I Dynamic Programming 95
2 Contingent Claims Analysis I14
3 Relationship between the Two Approaches t20
4 Guide to the Literature l/5
Appenclix A-Recursive Dynamic Programming 126
Appendix B-Optimal Stopping Regions 128
Appendix C-Smooth Pasting 130
Part III. A Firm's Decisions
5 Investment Opportunities and Investment Timing 135
I The Basic Model 136
2 Solution by Dynamic Programming 140
3 Solution by Contingent Claims Analysis 147
4 Characteristics of the Optimal Investment Rule 152
5 Altcrnative Stochastic Processes 161
6 Guide to the Literature 173
6 The Value ofa Project and the Decision to Invest 175
1 The Simpiest Case: No Operating Costs 177
2 0perating Costs and Temporary Suspension 186
3 A Project with Variable Output 195
4 Depreciation 199
5 Price and Cost Uncertainty 207
6 Guide to the Literature 211
7 Entry, Exit, Lay-Up, and Scrapping 213
1 Combined Entry and Exit Strategies 215
2 Lay-Up, Reactivation, and Scrapping 229
5 Barriers ancl Long-Run Disrribution S3
6 Jump Processes S-5
7 Guide to the Literature 87
Appendix-The Kolmogorov Equations . 88
4 Dynamic Optimizatic)n under Uncertainty 93
I Dynamic Programming 95
2 Contingent Claims Analysis I14
3 Relationship between the Two Approaches t20
4 Guide to the Literature l/5
Appenclix A-Recursive Dynamic Programming 126
Appendix B-Optimal Stopping Regions 128
Appendix C-Smooth Pasting 130
Part III. A Firm's Decisions
5 Investment Opportunities and Investment Timing 135
I The Basic Model 136
2 Solution by Dynamic Programming 140
3 Solution by Contingent Claims Analysis 147
4 Characteristics of the Optimal Investment Rule 152
5 Altcrnative Stochastic Processes 161
6 Guide to the Literature 173
6 The Value ofa Project and the Decision to Invest 175
1 The Simpiest Case: No Operating Costs 177
2 0perating Costs and Temporary Suspension 186
3 A Project with Variable Output 195
4 Depreciation 199
5 Price and Cost Uncertainty 207
6 Guide to the Literature 211
7 Entry, Exit, Lay-Up, and Scrapping 213
1 Combined Entry and Exit Strategies 215
2 Lay-Up, Reactivation, and Scrapping 229
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Part IV. Industrv Equilihrium
8 Dynamic Equilihrium in a Competitive Industry 247
t The Basic Iri[uition --4g
2 A"gregatc Unccrtainty --52
3 Inclustry Equilibrium with Exit 161
4 Firm-Specific Uncertainty 267
5 A General Model 277
6 Guicle to the Literature 280
9 Policy Intervention and Imperfect Competition 282
1 SocialOptimality 2S3
2 Analyses of Somc Commonly Used Policics 296
3 Example of an Oligopolistic Industry 3Il9
4 Guidc to the Literaturc 314
Appcndix-Somc Expccted Prcscnt Valucs 315
Part V. Extensions and Applicati s
10 Sequentiallnvestment 319
I Dccisions to Start :incl Complctc :i Multistagc Projcct 321
2 Continuous Invcstmcnt and Timch) BuilcJ 328
-3 The Lcarning Curvc ancl Optim:Il Production Dccisions _,39
4 Cost Uncertainty anci Lcarning 345
5 Guiclc to the Litcraturc 351
Appcndix-Numcrical Solution of I’:Irtial
Di rf'crcntial Equation 353
11 Incremental Investment and Capacity Choice 357
1 GrzlclLral Capacity Expansion with Diminishing Rcturns 359
2 Increasing Rcturns and Lumpy Additions to Capacity 377
3 AcljustmentCosts 3tSl
4 Guide to the Litcraturc 391
12 Applications and Empirical Research 394
1 Investments in Offshore Oil Rescrves 396
2 Electric Utilities' Compliancc with the Clcan Air Act 4()5
3 Trie Timing of Environmentai Poiicy 410
4 Explaining Aggregate Investment Bchavior 419
5 Guide to the Literature 425
References 429
Symbol Glossary 445
Author Index 449
Subject Index 455 | 