Determination of the maximum investment in a capital project

Abstract

The sensitivity of investment NPV (net present value) to the discount rate is widely known. However, no current finance or real estate textbook investigates the sensitivity of NPV to the net investment outlay, or the installed purchase price of the asset. Such information can be critical, particularly in situations in which the investment is to be acquired by bidding against other interested parties. The maximum investment, even assuming certainty in the estimates of cash flows, and so on, is complicated by a dependence of the depreciation on the investment in the project and the applicable tax laws. This paper offers a solution to the problem of calculating an estimate for the maximum price that can be paid for a capital investment and still achieve a positive NPV. © 1995 Taylor & Francis Group, LLC.