If we wait one year, the NPV at that time would be:

This $18.18 is the NPV one year from now. We need the value today, so we discount back one period:

So, the choice is clear. If we wait, the NPV is $16.53 today compared to $9.09 if we start immediately, so the optimal time to begin the project is one year from now.

The fact that we do not have to take a project immediately is often called the "option to wait." In our simple example, the value of the option to wait is the difference in NPVs, $16.53 - 9.09 = $7.44. This $7.44 is the extra value created by deferring the start of the project as opposed to taking it today.

As our example illustrates, the option to wait can be very valuable. Just how valuable depends on the type of project. If we were thinking about a consumer product intended to capitalize on a current fashion or trend, then the option to wait is probably not very valuable because the window of opportunity is probably short. In contrast, suppose the project in question is a proposal to replace an existing production facility with a new,

Ross et al.: Fundamentals V. Risk and Return 14. Options and Corporate of Corporate Finance, Sixth Finance

Edition, Alternate Edition higher-efficiency one. This type of investment can be made now or later. In this case, the option to wait may be very valuable.

The Investment Timing Decision

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