New Analysis of a Model of Time to Build

Abstract

We solve a model of time to build, in closed form, for the special case where the only option is commencing investment. The ratio of the optimal to the NPV investment threshold is as in the standard analysis of irreversible investment. We then report numerical solutions for the general case where there is also an option to suspend investment, investigating variation in the time to build, the uncertainty of payoff and the opportunity cost of foregone cashflows. The two options have opposite effects on the optimal investment decision and NPV calculation is sometimes an appropriate guide to investment.Irreversible investment, time to build, numerical solution of partial differential equations.