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Valuing Finite-Maturity Investment-Timing Options

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  • Moon Hoe Lee

Abstract

The investment-timing option (ITO) provides the ability to postpone rather than immediately implement or reject a capital budgeting process. It can significantly increase a project's value. A method for computing the value of an ITO for a postponable project with a finite maturing is presented. The effect of time until expiration on hurdle rates and the option to defer or reject the investment are also investigated.

Suggested Citation

  • Moon Hoe Lee, 1997. "Valuing Finite-Maturity Investment-Timing Options," Financial Management, Financial Management Association, vol. 26(2), Summer.
  • Handle: RePEc:fma:fmanag:lee97
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    Cited by:

    1. Giovanni Villani, 2009. "A Strategic R&D Investment with Flexible Development Time in Real Option Game Analysis," CESifo Working Paper Series 2728, CESifo Group Munich.
    2. Dias, José Carlos & Shackleton, Mark B., 2011. "Hysteresis effects under CIR interest rates," European Journal of Operational Research, Elsevier, vol. 211(3), pages 594-600, June.
    3. Giovanni Villani, 2008. "An R&D Investment Game under Uncertainty in Real Option Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 32(1), pages 199-219, September.
    4. Schwartz, Eduardo, 1998. "Valuing long-term commodity assets," Journal of Energy Finance & Development, Elsevier, vol. 3(2), pages 85-99.
    5. Armada, Manuel Rocha & Kryzanowski, Lawrence & Pereira, Paulo Jorge, 2007. "A modified finite-lived American exchange option methodology applied to real options valuation," Global Finance Journal, Elsevier, vol. 17(3), pages 419-438, March.

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