The Value of Flexibility in Sequencing Growth Investment

We analyze the investment decision of a firm that has an option to complete an investment project either in one lump or in two smaller parts at distinct points in time. The firm faces a trade-off between the cost savings that arise when the project is completed at once and the additional flexibility that arises when the firm is able to respond to resolving uncertainty by choosing optimal timing individually for each stage. We derive the optimal investment policy and show that, contrary to our initial presumption, higher uncertainty makes the lump investment more attractive relative to the apparently more flexible alternative of splitting the investment. JEL classification: C61, D81, G31 ∗We would like to thank seminar participants at Antwerp and Tilburg for helpful comments and suggestions. All remaining errors are ours.