Optimal land development decisions

This research models the development decision when net rents are growing geomet-rically and uncertainly, and capital intensity is variable. We derive simple rules for the optimal timing of land development projects based on the commonly used internal rate of return and net present value criteria. We show that, even under certainty, projects are opti-mally delayed beyond the point where net present value becomes nonnegative, if expected cash flows are growing. The ability to vary capital intensity also raises the specter of perverse responses where increases in interest rates accelerate investment decisions. The positive responses occur when growth rates are high or uncertainty is high. © 2001 Elsevier Science 1