Stop ou Encore: On the contingent corporate decisions to invest and disinvest

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In this paper we consider the valuation of a firm that holds simultaneously an option to expand and to abandon productions depending on the state of the market (good or bad). We investigate the corresponding optimal decision levels in the cases of the infinite and finite time horizon. Analytical formulas for the firm's value are provided. Numerical results document the behavior of the firm's value and optimal decision thresholds. We show how decision thresholds vary with time when the real options are finite-lived. We also show that not considering both opportunities simultaneously can lead to a suboptimal investment/disinvestment decision for the firm.

Author(s):

Souleymane Laminou Abdou    
University of Rennes 1
France

Franck Moraux    
University of Rennes 1
France