Capacity Expansion with Facilities Under Technological Improvement

Abstract

Practically all existing analyses covering the obsolescence or the improvement of productive facilities are concerned with equipment replacement. An extension of such considerations to general capital investment analysis would seem to be a natural development. The present analysis is related to an investment decision on the expansion of productive capacity in discrete steps with facilities which undergo technological improvement. First, the analysis for expansion in one step is developed after the effects of technological improvement on the price and operating cost of a future facility have been introduced. The discussion of one-step expansion is then extended to an N-step expansion. In both types of expansion, the necessary conditions for optimum values of investment decision variables are obtained in order to maximize the present value of the net profit over the planning period.