The Value of Waiting to Invest / Robert L. McDonald, Daniel Siegel.

By:

McDonald, Robert L

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w1019.Publication details: Cambridge, Mass. National Bureau of Economic Research 1982.Description: 1 online resource: illustrations (black and white)Subject(s):

G - Financial Economics

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Abstract: 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 time to invest and an explicit formula for the value of the option to invest are derived. The rule "invest if benefits exceed costs" does not properly account for the option value of waiting.Simulations show that this option value can be significant, and that for surprisingly reasonable parameter values it may be optimal to wait until benefits are twice the investment cost. Finally, we perform comparative static analysis on the valuation formula and on the rule for when to invest.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w1019 (Browse shelf(Opens below))	Not For Loan

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November 1982.

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 time to invest and an explicit formula for the value of the option to invest are derived. The rule "invest if benefits exceed costs" does not properly account for the option value of waiting.Simulations show that this option value can be significant, and that for surprisingly reasonable parameter values it may be optimal to wait until benefits are twice the investment cost. Finally, we perform comparative static analysis on the valuation formula and on the rule for when to invest.