Potential improvement of the operating cash flows from a project stimulates a firm to anticipate investment in the project. I characterize the optimal investment rule and derive the closed-form solution of the value of the option of waiting to invest. The major factors of investment forestalling are high project-value volatility, proximity to the project value that triggers cash flow improvement, and short status-quo operating cash flows.
Investment under uncertainty with potential improvement of the operating cash flows
SBUELZ, Alessandro
2005-01-01
Abstract
Potential improvement of the operating cash flows from a project stimulates a firm to anticipate investment in the project. I characterize the optimal investment rule and derive the closed-form solution of the value of the option of waiting to invest. The major factors of investment forestalling are high project-value volatility, proximity to the project value that triggers cash flow improvement, and short status-quo operating cash flows.
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