Consider the problem of a firm that earns operating profits (Kt1, t) in period t, where Kt1 is inherited capital and t is a random variable that determines productivity. The firm faces no lags in adjustment so that the firm can produce immediately with newly installed capital. However, the firm faces a constant returns to scale adjustment cost of the form C (It/Kt1) where It is investment. Time is discounted every period with the constant discount factor 1 1 r . Assume that the price of investment goods is 1 and there is no depreciation in capital