The Value of Waiting to Invest

38 Pages Posted: 27 Apr 2000 Last revised: 14 Apr 2008

Date Written: November 1982

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.

Suggested Citation

McDonald, Robert L. and Siegel, Daniel, The Value of Waiting to Invest (November 1982). NBER Working Paper No. w1019. Available at SSRN: https://ssrn.com/abstract=227179

Robert L. McDonald (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8344 (Phone)
847-491-5719 (Fax)

Daniel Siegel

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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