The Impact of Multiple Investment Opportunities on the Initial Investment

Standard real options theory addresses a firm’s investment problem from the perspective of a single investment, ignoring the impact of multiple investment options. This leads to opportunity loss, ultimately foregoing potential value enhancement for the firm. Intriguingly, our results suggest that by neglecting multiple investment options, firms may lose the potential value of size similar to the gains. Such loss in potential value gains is specifically more noticeable in low demand levels when uncertainty, investment cost differences, and discount factors are relatively low. Our findings indicate that considering multiple investment options influences the timing of investments. Specifically, each subsequent investment option reduces the value of waiting, leading to earlier investment undertakings.