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The Value of Waiting to Invest

Robert McDonald^1,2; DANIEL SIEGEL^1,2

¹ National Bureau of Economic Research · ² Kellogg's (Canada)

This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes. The optimal investment rule and an explicit formula for the value of the option to invest are derived, assuming that the option is valued by risk-averse investors who are well diversified. The same analysis is applied to the scrapping decision. Simulations show that this option value can be significant, and that for reasonable parameter values it is optimal to wait until benefits are twice the investment costs.

DOI

10.2307/1884175

Volume

101 (4)

Pages

707

Export

BibTeX

Sources

crossref openalex