Effect of Investment and Disinvestment Delay in Biofuels

Abstract

This research studies the strategic level decision-making in the biofuel industry by considering the effect of investment and disinvestment delay. Under uncertain environments, the delay causes additional risk exposure to decision makers, and the optimal decision reflects the effect of delay. This research provides the concise and comprehensive profile of the optimal investment and disinvestment policy by taking investment and disinvestment delay into consideration. The results show that the trend of fuel price plays a crucial role to determine the effect of delay. If the trend is favorable to the alternative biofuel plant, longer exercise delays provide the decision makers an incentive to act more quickly, and shorter delays provide an opposite incentive. By applying the suggested model to the bioenergy investments cases in the state of Georgia, the United States, we provide managerial insights for the strategic decision makers in the biofuel industry.