| I develop a theory of investment in multiple real assets or "resources". This theory focuses on the interaction among uncertainty, irreversibility, investment timing, and multi-dimensionality within the investment portfolio. Using a "real options" approach, this work provides qualitative insights on the character of optimal investment strategies and special "hedging" opportunities that arise in multi-dimensional models of real investments.; The dissertation consists of three related but self-contained essays. The first essay presents a general model of dynamic multi-resource investment under uncertainty. Consider a firm whose operating profit is concave as a function of current resource levels, and whose cost to adjust a resource level either up or down is linear. With essentially no restriction on the form of uncertainty, the optimal investment strategy is shown to follow a control limit policy. Investment policies of this form are optimal for any number of resources, with non-stationary problem parameters, and with either a finite or infinite planning horizon.; The second essay studies investment strategies under demand uncertainty for a multi-product firm with a linear manufacturing process. The model explicitly incorporates both capacity investment decisions and production decisions. The product demand vectors for successive periods are assumed to be independent and identically distributed. The optimal investment strategy is determined with a multi-dimensional newsvendor model using demand forecasts, a technology matrix, product contribution margins, and marginal investment costs. The hedging results are related to capacity planning practices in industry. They show that the common practice of coordinating investment decisions to a single deterministic production plan is generally suboptimal, regardless of which single production plan is chosen for planning purposes.; The last essay studies investment in flexible manufacturing capacity when product demand is uncertain. In a stylized model with just two products, I show how optimal investments vary as a function of investment cost and product profit margins, and also as a function of demand variability and the correlation between product demands. Simple, closed form expressions and graphical explanations are presented. One surprising result is that flexibility can be valuable even with perfectly positively correlated product demand. |
