Sequential Investment and Time to Build

Schmalenbach Business Review (sbr), Vol. 54, January 2002

22 Pages Posted: 17 Jun 2002  

Gunther Friedl

Technische Universität München (TUM) - Faculty of Economics and Business Administration

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

Friedl, Gunther, Sequential Investment and Time to Build. Schmalenbach Business Review (sbr), Vol. 54, January 2002. Available at SSRN: https://ssrn.com/abstract=313564 or http://dx.doi.org/10.2139/ssrn.313564

Gunther Friedl (Contact Author)

Technische Universität München (TUM) - Faculty of Economics and Business Administration ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 28925800 (Phone)

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