An impulse‐control method for investment decisions in dynamic technology

This paper presents a new framework to augment standard methods in evaluating profitability of investments, especially those involved in dynamic technology. In this case there is a possibility that although a certain investment is profitable using standard methods, it should not be undertaken because it precludes a more profitable investment later on, when more advanced equipment will be available. The investment decision faced by a firm is presented here as an impulse‐control problem, where the process of technological progress is modelled explicitly. The outcome of the optimization yields, in addition to investment expenditures, the expected time period between consecutive investments. A simple example demonstrates the use of the technique in actual investment decisions.