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We compare the use of stochastic dynamic programming (SDP), Neural Networks and a simple approximation rule for calculating the real option value of a flexible production system. While SDP yields the best solution to the problem, it is computationally prohibitive for larger settings. We test two approximations of the value function and show that the results are comparable to those obtained via SDP...
We analyze the optimal investment strategy of a firm that can complete a project either in one stage at a single freely chosen time point or in incremental steps at distinct time points. The presence of economies of scale gives rise to the following trade-off: lumpy investment has a lower total cost, but stepwise investment gives more flexibility by letting the firm choose the timing individually...
Irreversible investments made with incomplete information are the mainstay of the petroleum industry. Sequential, non-repetitive investment decisions with alternative pathways associated with exploration through full-field development are common. We demonstrate a policy development approach that combines the Bellman equation for dynamic programming with a real options valuation algorithm. This represents...
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