A Study on Estimating Investment Timing of Real Options

Abstract

One of the most critical issues in real options analysis is determining the optimal timing of the irreversible investment during the life of the option. Research indicates that failing to exercise real options on time reduces the project's value much less than predicted. However, the question of whether real option holders exercise their options optimally has not been extensively researched. In this research, an early decision rule for real options is developed, and a simulation technique validates this rule. The result of the simulation indicates that the suggested decision rule gives higher profits than the traditional rule in most cases.