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Investment Under Uncertainty with Implementation Delay

Author

Listed:
  • Laurent Gauthier

    (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis, CAC-IXXI, Complex Systems Institute, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • Erwan Morellec

    (University of Rochester [USA])

Abstract

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 derive the value of this option for various exercise policies corresponding to different levels of freedom with respect to the abandonment of the project and analyse its effects on the investment policy of the firm.

Suggested Citation

  • Laurent Gauthier & Erwan Morellec, 2000. "Investment Under Uncertainty with Implementation Delay," Working Papers hal-04425265, HAL.
    • Handle: RePEc:hal:wpaper:hal-04425265
    Note: View the original document on HAL open archive server: https://univ-paris8.hal.science/hal-04425265
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