Optimal entry to an irreversible investment plan with non convex costs

A problem of optimally purchasing electricity at a real-valued spot price (that is, allowing negative prices) has been recently addressed in De Angelis et al. (SIAM J Control Optim 53(3), 1199–1223, 2015). The problem can be considered one of irreversible investment with a cost function which is non convex with respect to the control variable. In this paper we study optimal entry into the investment plan. The optimal entry policy can have an irregular boundary, with a kinked shape

The Impact of Profit Taxation on Capitalized Investment with Options to Delay and Divest

In entrepreneurial decisions making uncertain future profits often are a main characteristics of real investment opportunities. If investors can react to uncertainty the degree of irreversibility and timing flexibility inherent in the available project should be integrated into the decision calculus. In this paper we investigate the interdependencies of effects from profit taxation and real options. We model an investment decision including an option to invest and an option to abandon. We show that increasing the tax rate can lead to paradoxical tax effects, i.e. may foster an investor's willingness to invest into a capitalized investment. Instead, if we abstract from the possibility to abandon the investment object such paradoxical effect cannot be identified. Determining the after-tax value of the option to enter the investment project with and without an abandonment option we receive a critical cash flow cutoff level. We find that the value of the option to abandon depends on the tax rate and the amount of periodical cash flows. The option value can be increasing or decreasing in the tax rate. We find scenarios with paradoxical tax effects and show that the observed paradoxical effects are due to the presence of the real abandonment option itself. This finding contributes to the stream of literature that explains potential sources of paradoxical tax effects. The generated decision rules are helpful for investors facing risky investment opportunities and for discussing the economic impact of tax reforms. Furthermore, we highlight the overwhelming importance of integrating taxes in typically applied valuation approaches

Harvesting Policies with Stepwise Effort and Logistic Growth in a Random Environment

Recently, we have developed optimal harvesting policies based on profit optimization in random varying environments. Namely, we have considered a logistic stochastic differential equation growth model, with the purpose of discussing the use of variable versus constant effort harvesting policies in terms of the expected accumulated discounted profit during a finite time interval. Using realistic parameters, we have concluded that there is only a slight reduction in profit when choosing the applicable constant effort policy instead of the variable effort policy, which presents strong disadvantages. Here, we apply a logistic growth model and a more general profit structure to present alternative policies based on variable effort, named stepwise policies, where the harvesting effort is determined, under the optimal variable effort policy, at the beginning of each year (or of each biennium) but is kept constant during that year (biennium). Replacing the optimal variable effort policy by these stepwise non-optimal policies has the advantage of applicability but, at best, considerably reduces the already small profit advantage the optimal variable effort policy has over the optimal constant effort sustainable policy

Assessing the timing of mining investment under tax policy uncertainty: the case of the Asia-Pacific region

Mining involves the discovery, extraction, and processing of non-renewable resources. The potential of mining revenues to contribute to national economic development is well known, but the allocation of mineral wealth and the concern of increasing resource scarcity have become issues of debate in the mining industry. The purpose of this study is to introduce the binomial decision tree analysis, which is a new approach to mining investment decisions. The examples used examine the impact by a policy change. Using three mining projects in the Asia-Pacific, in Australia, Indonesia and Papua New Guinea, findings about options for the investor suggest it is sometimes better to wait for a more suitable time to invest. Using such knowledge provides the potential to change the investment climate in mining

Carbon Subsidies, Taxes and Optimal Forest Management

Optimal forest harvest policy, Real options, Carbon credits, Q23, Q28, Q15,