In particular if we can delay the investment decision

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Unformatted text preview: ovide extra land and space for a second production line when designing a production facility. A pharmaceutical company acquiring a patent that gives the right, but not the obligation to market a new drug. Building 6-lane bridges when building a 4-lane highway. 10.2 Timing option An investment opportunity with positive NPV does not mean that we should go ahead today. In particular if we can delay the investment decision we have an option to wait. The optimal timing is a trade-off between cash flows today and cash flows in the future. Examples of timing options: - The decision when to harvest a forest 10.3 Abandonment option Traditional capital budgeting assumes that a project will operate in each year during its lifetime. However, in reality firms may have the option to cease a project during its life. An option to abandon a project is valuable: If bad news arrives you will exercise the option to abandon the project if the value recovered Download free ebooks at 87 Corporate Finance Real options from the project’s assets is greater than the present value of continuing the project. A...
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