Payback and the Value of Waiting to Invest
19 Pages Posted: 19 May 1997
Abstract
Despite being rejected by finance theory, payback continues to be widelyused as a method for evaluating capital investment projects. In situations where investment can be delayed, we show that the value of waiting to invest is an increasing function of payback period. Consequently, the optimal investment policy is equivalent to requiring that a project with positive net-present-value be launched immediately if and only if its payback period is less than a critical value P*.
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
Boyle, Glenn and Guthrie, Graeme, Payback and the Value of Waiting to Invest. Available at SSRN: https://ssrn.com/abstract=74 or http://dx.doi.org/10.2139/ssrn.74
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