Adoption of uncertain multi-stage technology projects: a real options approach

This study develops a real options approach in order to characterize the optimal timing of when to adopt an incumbent technology, incorporating as an embedded option a technologically uncertain prospect of opportunities for updating the technology to future superior versions. We develop a new mathematical approach based on the Green representation of Markovian functionals for finding the optimal exercise thresholds both of the ordinary real option associated with the updating decision and of the compound real option associated with the incumbent technology. We characterize how the real option values depend on the underlying market uncertainty and on the uncorrelated technological uncertainty regarding future new generations of the technology. (C) 2001 Elsevier Science B.V. All rights reserved.