Investment under uncertainty with implementation delay

One of the major characteristics of the capital budgeting process is the delay existing between the investment decision and its implementation. This paper analyses investment decisions under uncertainty with implementation delay in a unified analytical framework. We provide closed-form solutions relating the value of the investment opportunity and the optimal investment threshold to the size of the delay. We show that the implementation lag creates an embedded option for the investor: the option to abandon the project during this delay. We de- rive the value of this option for various exercise policies corresponding to different levels of freedom with respect to the abandonment of the project and analyze its effects on the investment policy of the firm.

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New Developments and Applications in Real Options

 Record created 2013-08-14, last modified 2018-03-17

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