Capital Budgeting Under Uncertainty: The Issue of Optimal Timing

In a capital budgeting decision, timing is often an important part of the decision-maker’s opportunity set. The ability of the manager to choose when to undertake an investment has similarities to the ability of the holder of a securities option to choose when to exercise that option. This paper uses formulas developed for the valuation of securities options to evaluate the timing option and to derive decision rules for optimal investment timing. The paper provides examples of application in the cases of plant and equipment replacement, marketing of new products, and real estate development.