The Value of Waiting to Invest

Robert L. McDonald and Daniel Siegel

No 1019, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1982-11
Note: ME
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Citations: View citations in EconPapers (8)

Published as McDonald, Robert L. and Daniel Siegel. "The Value of Waiting to Invest," Quarterly Journal of Eocnomics, Vol. 101, No. 4, (November 1986), pp. 707-727 .

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