Valuing the Option to Delay in Engineering Management: A Case Study

Abstract

An option to delay can increase a project's value by providing the flexibility of choosing various decision alternatives after an uncertainty has been revealed. Therefore, options are valuable in settings with high uncertainty and high upfront investments. This paper presents an engineering management decision and determines the corresponding value of the option to delay using a decision analytic approach. The case study and sensitivity analyses show that the option value attains its maximum at the parameter setting that makes the decision maker without the option to delay indifferent between alternatives, indicating the close relationship between the value of perfect information and option value. The insights provide rules of thumb and provide an upper limit to how much should be spent on attaining an option to delay.