Optimal timing strategy for project evaluation and implementation

This paper investigates an economic methodology for project evaluation, which explicitly incorporates evaluation costs and the option value of flexibility in decisions. The traditional cost-benefit analysis is fundamentally based upon a ´now or never principle´, and fails to evaluate the option value derived by reserving decisions to wait for more concrete information. In this paper, the real option model is formulated to determine the optimal timing strategy for project evaluation and implementation. The optimal solutions of the model can be obtained by solving the integral equation models. This paper is concluded by illustrating numerical examples to demonstrate the availability of the methodology.