The value of waiting to invest

Robert McDonald, Daniel Siegel

Research output: Contribution to journalArticlepeer-review

1672 Scopus citations

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 investment rule and an explicit formula for the value of the option to invest are derived, assuming that the option is valued by risk-averse investors who are well diversified. The same analysis is applied to the scrapping decision. Simulations show that this option value can be significant, and that for reasonable parameter values it is optimal to wait until benefits are twice the investment costs.
Original languageEnglish
Pages (from-to)707-727
JournalThe Quarterly Journal of Economics
Volume101
DOIs
StatePublished - 1986

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