TITLE:
The Effect of Changes in Regulation and Technology on Capital Investments
AUTHORS:
Vivian O. Okere, Wen Chen
KEYWORDS:
Capital Investments, Real Option, Carbon Tax, Technology, Discount Rate, Stochastic Cash Flows
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.11 No.2,
May
31,
2021
ABSTRACT: Uncertainties in regulation could affect the decision to invest in irreversible capital projects. We use the geometric Brownian motion to analyze the effect of a stochastic carbon tax on the cash flows expected from investments and the value of the investments. Successful legislation on carbon tax may trigger changes in technology. Our results show that carbon tax accompanied by the adoption of a new technology could affect the value of an irreversible investment. Also the decision to invest depends on whether the cash flows exceed a pre-determined critical cash flow.