Sequential Investment and Time to Build
Technische Universität München (TUM) - Faculty of Economics and Business Administration
Schmalenbach Business Review (sbr), Vol. 54, January 2002
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
Date posted: June 17, 2002
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