Stepwise Investment Value under Stage Specific Parameters

comments on related versions. Abstract We provide a general model for comparing stepwise and lumpy investments, considering stage specific volatilities, drifts and possibility of project failure. Stepwise investments allow for interim project value realizations, instead of considering only a final project value as in sequential investments. We conceive of an environment in which stepwise investment costs exceed lumpy investments, even if the total combined project value of the stages equals the lumpy project value. We find there are tight conditions on the parameter values required in order to compare the two strategies. Also that increased uncertainty does not necessarily reduce the relative value of stepwise investments. We evaluate the tradeoffs between the proportion of project value in each stage, and the relative investment costs. Our model could be extended to allow for inhibited or enhanced second stage project values, or even reduced investment costs, due to a learning effect, in arriving at those optimal trade-offs.