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Publication: Journal of Forest Products Business Research
Authors: 0
Reference ID: Volume 8, Article No. 1
Publish Year: 2011
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Title: Investment Decisions of a New Linerboard Mill under Market Uncertainty
The pulp and paper sector is a key component of the forest products industry in the United States. Pulp and paper production is highly capital-intensive and asset-specific. The installment of a pulp and paper mill is functionally irreversible and the return from such an investment is uncertain. Both irreversibility and uncertainty should be considered when making the investment decision. In this study, we applied the real options approach to examine investment triggering conditions for heterogeneous linerboard producers under two different price assumptions: random walk vs. mean reversion. The solution was solved by complex analytical methods and the application extended the discussion of investment models under uncertainty. The results indicate that investment-triggering prices differed under alternative price assumptions and that the uncertainty premium depends on the producer's efficiency.

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