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Publication Detailed Description
Durable vs. disposable equipment choice under interest rate uncertainty
Journal Title
European Journal of Finance
Year (definitive publication)
2009
Language
English
Country
United Kingdom
More Information
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Abstract
This article analyzes present value costs under stochastic interest rates and investigates the effect of interest rate uncertainty on the replacement investment decision that a firm must make when a piece of equipment becomes obsolete and needs replacement with either short-or long-lived equipment. We consider the replacement problem under stochastic interest rates in a CIR economy (Cox, Ingersoll, and Ross 1985a,b). Depending on the interest rate levels, interest rate volatility and the optionality to switch between durable and expendable assets at each renewal time, managers may prefer to invest in long-lived but more expensive assets instead of short-lived but less costly assets and vice versa.
Acknowledgements
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Keywords
Interest rate policy,Interest rate uncertainty,Real options,Replacement investment decisions
Fields of Science and Technology Classification
- Economics and Business - Social Sciences
Contributions to the Sustainable Development Goals of the United Nations
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