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New Analysis of a Model of Time to Build

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  • Alistair Milne
  • A Elizabeth Whalley

Abstract

We solve a model of time to build, in closed form, for the special case where the only option is commencing investment. The ratio of the optimal to the NPV investment threshold is as in the standard analysis of irreversible investment. We then report numerical solutions for the general case where there is also an option to suspend investment, investigating variation in the time to build, the uncertainty of payoff and the opportunity cost of foregone cashflows. The two options have opposite effects on the optimal investment decision and NPV calculation is sometimes an appropriate guide to investment.

Suggested Citation

  • Alistair Milne & A Elizabeth Whalley, 1996. "New Analysis of a Model of Time to Build," School of Economics Discussion Papers 9603, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:9603
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    File URL: https://repec.som.surrey.ac.uk/archive/surrec9603.pdf
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    References listed on IDEAS

    as
    1. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    More about this item

    Keywords

    Irreversible investment; time to build; numerical solution of partial differential equations.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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