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Journal of Financial Economics Vol. 56 No. 2 2000

‘Time to build, option value and investment decisions’: a comment

Alistair Milne1; A Elizabeth Whalley2

1 Department of Banking and Finance, City University Business School, London EC2Y 8HB, UK · 2 University of Warwick

Abstract

We correct the analysis of the model of time to build in Majd and Pindyck (1987 Journal of Financial Economics 18, 7–27) for the omission of an essential optimality condition. Our analysis reveals an additional insight: long times to build reduce the effects of increased project value volatility (i.e., higher investment thresholds) in comparison to standard real option models of investment under uncertainty, where investment is instantaneous. Thus, a ‘naı̈ve’ NPV rule can sometimes be an appropriate initial guide to investment.

DOI
10.1016/s0304-405x(00)00043-x
Volume
56
Issue
2
Pages
325-332
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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