Ep42 Waiting To Invest

Ep42 Waiting To Invest

Net Present Value (NPV) Rule

  • The NPV rule is used to make investment decisions by comparing the benefits and costs of a project.
  • If the NPV is positive, the project should be undertaken, and if it is negative, the project should not be undertaken.

Option to Delay Investment

  • The NPV rule assumes that an investment opportunity is a "take it or leave it" decision, but in reality, there may be an option to delay the investment decision.
  • The value of waiting depends on the trade-off between the cost of delaying the decision and the value of the information that will be learned in the interim.
  • Financial economics provides tools to value options, which can be used to structure the decision of whether or not to delay an investment.
  • Examples of options to delay include beta versions or pilot projects for new products, which allow for testing and learning before making a full-scale investment.

Costs and Benefits of Delaying Investment

  • There are several costs associated with delaying an investment decision, including missing out on potential cash flows, losing competitive advantage, and appearing indecisive to stakeholders.
  • The option to delay an investment decision can be valuable because it allows a company to learn more information about the future cash flows of the project before committing to it.

Growth Options

  • Growth options are valuable when there is uncertainty about the future applications of a product or service.
  • Companies can create their own growth options by being flexible and adaptable.
  • Growth options should be considered in investment planning.

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