The net present value method versus the option value of waiting: A note on Farzin, Huisman and Kort (1998)

Using the tools of real-options theory, Farzin, Huisman and Kort (1998) investigate the optimal timing of technology adoption in a model in which there is ongoing technological progress and the "rm's investment decision is irreversible. When the "rm can switch technologies n(R times, Farzin et al. (1998) obtain the surprising result that the criterion for adopting a new technology derived from real-options theory coincides with the net present value criterion for all but the last switch. This note points out a mistake in Farzin et al.'s (1998) derivations that leads to the above result. We show that, compared to the net present value approach, the "rm will defer the adoption of a new technology when it takes the option value of waiting into account. 2001 Elsevier Science B.V. All rights reserved. JEL classixcation: D81; D92; O33