Real options approach for optimal investment decision timing

Abstract

Summary form only given. In this paper, we developed a model deciding the optimal investment decision time: invest now or wait more? Using the real options approach and considering the opportunity costs due to delay, the model derived the optimal deferring time until a decision is made. The model decides how long the decision has to be deferred when it is not desirable to invest now. The model would be very useful for overcoming the problem of the net present value (NPV) rule. With this approach, contingent decisions can be made based on the observation of uncertainty resolutions. Also, it minimizes the number of re-evaluations for the investment cost and the value of the opportunity, which enables us to save much time and cost. Moreover, it is applicable to the development of a new product or service case where there are no current market transactions. We believe that this model would be very useful in overcoming the problem of NPV decision criterion. With this approach, we can make contingent decisions based on the observation of uncertainty resolutions, and improve business performance.