TY  - JOUR
AU  - McDonald,Robert L.
AU  - Siegel,Daniel
TI  - The Value of Waiting to Invest
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1019
PY  - 1987
Y2  - March 1987
UR  - http://www.nber.org/papers/w1019
L1  - http://www.nber.org/papers/w1019.pdf
N1  - Author contact info:
Robert L. McDonald
Department of Finance  Jacobs Center
Northwestern University
2001 Sheridan Rd.
Evanston, IL  60208-2006
Tel: 847-491-8344
Fax: 847-491-5719
E-Mail: r-mcdonald@northwestern.edu
AB  - 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.
ER  -