Valuing Finite-Maturity Investment-Timing Options

The investment-timing option (ITO) provides the ability to postpone rather than immediately implement or reject a capital budgeting process. It can significantly increase a project's value. A method for computing the value of an ITO for a postponable project with a finite maturing is presented. The effect of time until expiration on hurdle rates and the option to defer or reject the investment are also investigated.