The Firm's Investment Under Uncertainty

The key of the firm's investment principle was the problem of the optimal time to invest, to maximize the value of the project. The net present value rule is the basic for the neoclassical theory of investment. However, it is based on some implicit assumptions that are often overlooked in highly volatility market . If the firm does not undertake the investment now, it will not be able to in the future. The opportunity cost of investing can be large, and investment rules that ignore it can be grossly in error. Also, this opportunity cost is highly sensitive to uncertainty over the future value of the project. The paper models investment problem under that the profit of project is driven by geometric Brown motion, and solves the problem through stopping time analysis and dynamic programming with a series of conclusions and explicit rule of investment .The paper studies the value of the project for Oligopolist and Duopoly respectively under the uncertainty of the profit based on the method of real options and by the same time making a comparative static analysis as well as sensibility analysis for the result. We simultaneously examine the optimal timing of firm's investment and the value of project under uncertainty and incomplete information in a real option and game-theoretic.