Sequential Investment and Time to Build

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.

Number of Pages in PDF File: 22

JEL Classification: G31

Accepted Paper Series