Optimal Investment Timing and Size of a Logistics Park: A Real Options Perspective

This paper uses a real options approach to address optimal timing and size of a logistics park investment with logistics demand volatility. Two important problems are examined: when should an investment be introduced, and what size should it be? A real option model is proposed to explicitly incorporate the effect of government subsidies on logistics park investment. Logistic demand that triggers the threshold for investment in a logistics park project is explored analytically. Comparative static analyses of logistics park investment are also carried out. Our analytical results show that (1) investors will select smaller sized logistics parks and prepone the investment if government subsidies are considered; (2) the real option will postpone the optimal investment timing of logistics parks compared with net present value approach; and (3) logistic demands can significantly affect the optimal investment size and timing of logistics park investment.