An Irreversible Investment Problem with Maintenance Expenditure

This paper studies the optimal investment problem with maintenance expenditure of a firm under uncertainty. We assume that the investment is irreversible and the maintenance cost of the firm has positive effects on its stochastically growing capital productivity. The objective of the firm is to construct optimal investing and maintenance policies to maximize its expected total cash flow over the infinite time horizon. We adopt the penalty method to obtain a solution of the variational inequality associated with the optimization problem. The optimal solution of barrier type for the investment-maintenance problem is shown to exist.