Should we wait or proceed?

• If we proceed today, NPV = $6,190.

• If we wait one year, Expected NPV at t = 1 is
0.5($37,889) + 0.5(0) = $18,944.57, which is
worth $18,944.57 / (1.10) = $17,222.34 in
today’s dollars (assuming a 10% discount rate).
• Therefore, it makes sense to wait.
Issues to consider with investment timing
options
• What’s the appropriate discount rate?
• Note that increased volatility makes the option to
delay more attractive.
• If instead, there was a 50% chance the subsequent
CFs will be $53,500 a year, and a 50% chance the
subsequent CFs will be $13,500 a year, expected
NPV next year (if we delay) would be:
0.5($69,588) + 0.5(0) = $34,794 > $18,944.57
Factors to consider when deciding when to
invest
• Delaying the project means that cash flows
come later rather than sooner.
• It might make sense to proceed today if there
are important advantages to being the first
competitor to enter a market.
• Waiting may allow you to take advantage of
changing conditions.
Abandonment/shutdown option

• Project Y has an initial, up-front cost of

$200,000, at t = 0. The project is expected to
produce after-tax net cash flows of $80,000 for
the next three years.
• At a 10% discount rate, what is Project Y’s NPV?

0 1 2 3
k = 10%

-$200,000 80,000 80,000 80,000

NPV = -$1,051.84