Optimal Switching Between Cash-Flow Streams

We consider the problem of finding the optimal time to switch between two measurable cash-flow streams. A complete characterization of the set of solutions is obtained in terms of adjoint variables which measure the available gain from deviations. An iterative procedure for the computation of the adjoint variables is provided. The results are generalized to multiple switching times, multiple cash-flow streams, switching costs, as well as switch-triggered cash-flow streams that arise in equipment-replacement problems.