Sequential Investment And Time To Build

Gunther Friedl

Schmalenbach Business Review (sbr), 2002, vol. 54, issue 1, 56-79

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-codes: G31 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (6)

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