Investment Timing Option

An option as to when to begin a project. Often, if a firm can delay a decision, it

can increase a project’s expected NPV.
A conventional NPV analysis assumes that projects will either be accepted or rejected,
which implies that they will be undertaken now or never. However, in practice
companies sometimes have a third choice—delay the decision until later, when more
information becomes available. Such investment timing options can affect a project’s
estimated profitability and risk.

When making go-versus-wait decisions, financial managers need to consider several

other factors. First, if a firm decides to wait, it may lose strategic advantages
associated with being the first supplier in a new line of business, and this could reduce
the cash flows. On the other hand, as we saw in the preceding example, waiting may
enable the company to avoid a costly mistake. In general, the more uncertainty there
is about future market conditions, the more attractive it becomes to wait, but this risk
reduction may be offset by the loss of the “first mover advantage.” Again, any such
first mover advantage can be compared with the value of the option.