Models for Investment and Disinvestment Decision Making under Uncertainty. Final Report

摘要

The report reviews, extends and adapts for empirical work the theoretical framework for decisions regarding the investment, disinvestment and use of durable assets under conditions of uncertainty. The relevance to the utility industry is that their ability to supply a time-varying demand for their product depends on the accumulation of investments, disinvestments and use of durable assets. A general framework is presented for prescribing durable investment and related decisions. In order to do so, relationships are identified that account for capacity and inventory costs as well as identifying the interdependencies between the two in a dynamic (time) analysis. To aid in the decisionmaking process under uncertainty, while accounting for unique risk preferences, a new risk-efficiency criterion is reviewed. In addition, a measurement technique for identifying risk preferences is introduced. Utilizing the theoretical developments and the new risk-efficiency criterion for ordering action choices, a general simulation model was then developed. The model, of intermediate complexity, is intended to be used in the initial stages of screening investment options. In an empirical test, the newly developed model obtained nearly the same results as the well-established Minimum Revenue Requirements method. The new theory and simulation model, however, have broader capabilities for application at the capacity or corporate planning level.