New investment approach predicts optimal timing for project expansion and stock options.
The article presents a simple method for deciding when to invest in projects that can be delayed. It suggests using a modified discount rate based on the ratio of mortgage rates to riskless rates for projects affected by interest rate uncertainty. For projects involving a firm's option to expand, it recommends expanding only when a specific call option on the firm's stock has no time value. These rules are practical and don't rely on assumptions about interest rate dynamics.