'Time to Build, Option Value and Investment Decisions': A Comment
Posted: 21 Jun 2001
Abstract
We correct the analysis of the model of time to build in Majd and Pindyck (1987 Journal of Financial Economics 18, 7-27) for the omission of an essential optimality condition. Our analysis reveals an additional insight: long times to build reduce the effects of increased project value volatility (i.e., higher investment thresholds) in comparison to standard real option models of investment under uncertainty, where investment is instantaneous. Thus, a 'naive' NPV rule can sometimes be an appropriate initial guide to investment.
Keywords: Irreversible investment; Time to build
JEL Classification: C63, D92
Suggested Citation: Suggested Citation
Milne, Alistair K. L. and Whalley, A. Elizabeth, 'Time to Build, Option Value and Investment Decisions': A Comment. Journal of Financial Economics, Vol. 56, No. 2, May 1, 2000, Cass Business School Research Paper, WBS Finance Group Research Paper No. 7, Available at SSRN: https://ssrn.com/abstract=251506
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