| Article ID: | iaor20122374 |
| Volume: | 220 |
| Issue: | 1 |
| Start Page Number: | 286 |
| End Page Number: | 294 |
| Publication Date: | Jul 2012 |
| Journal: | European Journal of Operational Research |
| Authors: | Sbuelz Alessandro, Caliari Marco |
| Keywords: | simulation: applications, risk |
Given a non‐trivial market price of risk, we study the impact of state‐dependent cashflow risk on the optimal investment policy and on the ensuing value of an unlevered firm that holds the option of scaling up cashflows from its assets in place upon incurring an irreversible cost. The firm’s investment decision and value are studied as a function of the market price of risk and of the degree of state dependence in cashflow risk.