Waiting Cost Models for Real Options

Literature Critique
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Eschenbach, T. G., Lewis, N. A., & Hartman, J. C. (2009). Technical Note: Waiting Cost Models for Real Options. The Engineering Economist: A Journal Devoted to the Problems of Capital Investment , 54 (1), 1-21.
This article discusses the waiting cost models associated with the real options. In Engineering, a project can be delayed because of many factors such poor preparations or technical problems. Real options are used to measure the value of delaying such engineering projects. When a project is delayed, the benefits associated with such a project are lost. These include cash flows and market share among others. Economically, the loss of benefits associated with a project is referred to as the opportunity cost. The waiting costs of implementing a project therefore constitute the opportunity cost. Thus, the article mainly focuses on the waiting cost models that can be used to measure the opportunity cost associated with a delayed engineering project.
There exists different waiting cost models discussed in the article. One of these models is the Black-Scholes model, which measures the value of dividends lost when a project is delayed. The model is a financial application that uses the loss of dividends at a rate (D) to model the cost of waiting. In this case, the dividends that would have been earned if the project were undertaken are converted into present cash flows to estimate the opportunity cost associated with the delay. The other model uses uniform cash flows to estimate the opportunity cost associated with delaying an engineering cost. This model assumes the simplified form of cash flows associated with a project. The simplified form assumes an initial cost P at time0, a net benefit A at the end of period 1-N, and a salvage value F at time N. When a project is delayed, there is no net benefit A, which is a loss. This is therefore the opportunity cost of delaying the project. The other model discussed in the article is the Limited Market Window Model. In this model, the first T years of an M-period of constant cash flows are lost. The period T is the duration of delay of the project. The loss undergone during the period is an opportunity cost. The other model discussed in the Limited Technology-Generation Model. In this case, when a project is delayed, an engineering firm can incur an opportunity cost for failing to utilize its machinery.
The article has combined the different models of waiting cost to determine their similarities and differences. This has bee...