Sequential Investment and Time to Build
Schmalenbach Business Review (sbr), Vol. 54, January 2002
22 Pages Posted: 17 Jun 2002
Abstract
Real world investment decisions are generally made sequentially, over time. Management must consider the possibility of subsequent decisions like suspending a project when an initial investment decision is made. This consideration seems to be particularly important in the case of investments, which take a long time to build. In this paper, I analyze the impact of lags between the initial investment decision and the completion of the project. I also analyze in a dynamic setting under uncertainty the impact on the investment value of the option to suspend investment or operations and the investment threshold. I show that the standard net present value rule works well within my framework. This result contrasts with the main results in most of the real options literature. I use my model to value the length of permit procedures for locational decisions.
JEL Classification: G31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Value of Waiting to Invest
By Robert L. Mcdonald and Daniel Siegel
-
Irreversible Investment, Capacity Choice, and the Value of the Firm
-
Time to Build, Option Value, and Investment Decisions
By Saman Majd and Robert S. Pindyck
-
By Gene M. Grossman and Carl Shapiro
-
The Learning Curve and Optimal Production Under Uncertainty
By Saman Majd and Robert S. Pindyck
-
Tax Asymmetries and Corporate Income Tax Reform
By Saman Majd and Stewart C. Myers