Cashflow Immediacy and the Value of Investment Timing

Glenn W. Boyle and Graeme Guthrie

No 33486, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: We examine the relationship between project value and cashflow immediacy when interest rates are uncertain and investment can be delayed. The value of investment delay has two components: the expected gain from committing now to investment at a future date and the potential gain from the ability to reverse this commitment. Holding the value of immediate investment constant, we show that the values of both components are increasing in the proportion of project cashflows that accrue in the more distant future, so total project value is greater for long-term projects. Our results emphasize the importance of the interaction between cashflow immediacy and interest rate uncertainty for the optimal investment policy.

Keywords: Cashflow immediacy; Interest rate uncertainty; Optimal investment policy (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:33486

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