EVALUATING UPGRADE OPTIONS UNDER SEQUENTIAL TECHNOLOGY INNOVATIONS

This study employs a real option pricing approach to conduct an evaluation of the optimal investment strategy for a firm confronted with sequential technology innovations. Stochastic assumptions of innovations in their arrival times and their profitability are added to the model, so as to conform to the most important characteristics of real-world technology markets. Furthermore, this study incorporates a dividend-like payout yield which stands for the opportunity cost of waiting to invest. Simulations and sensitivity analysis of the derived model are presented. It is hoped that the results of this study will help predict actual firm policy.