Capacity expansion with interrupted demand growth (Q1094323)

In most long-range planning problems accurate forecasting of demand growth is often difficult. Sometimes unexpected shocks in the economy occur and disrupt the predicted growth rate of demand. For example, growth can unexpectedly cease for an indeterminate length of time due to crucial occurences such as wars, economic recessions or oil price shocks. In this paper, we examine the effects of unforeseen demand plateaus on the capacity expansion problem of sizing and timing production facilities. We assume that demand for capacity follows a stochastic process. That is, we allow for plateaus to happen at random future times and to continue for an uncertain duration. When the demand process is generated by an alternating renewal process, we show that demand plateaus result in a modified discounting rate and a modified import cost.