Optimal timing for market entry

Abstract

This paper considers the optimal market entry timing of a firm facing price uncertainty andinvestment irreversibility. When the entry decision is made, the firm has to pay the necessaryinvestment costs and from then onwards will receive the expected future cash-flows. The totalexpected income of the investment is given by the sum over time of the expected discountedfuture cash-flows. For the investment to be worthwhile this value must be significantly above,and not just above, the investment cost. Therefore, we address investment decisions where onemust decide when it is the best time to make a commitment, losing the option to wait for a bettermarket opportunity.We developed a model that provides us with a rule that specifies under which conditions weshould enter the market. In addition, the methodology developed also provides an estimate onhow long we should wait before entering the market.