The Business Case With a Convenient Discount Rate
A mid-size logistics firm is evaluating an automated warehouse routing system. The sponsor's business case projects $4.2M in annual labor savings, a 3-year payback, and an NPV of $2.1M at a 10% discount rate. A finance analyst notes that the labor savings assume 100% adoption in month one, the vendor's implementation track record includes two failed deployments at comparable sites, and the discount rate was set at 10% while the firm's cost of capital is 14%. The sponsor argues the project is strategically necessary and that conservative assumptions would 'kill a good project.'
1. Identify the specific flaws in the business case and assess their direction of impact.
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Four flaws, all biasing the case upward:
Adoption curve. 100% adoption in month one is implausible for a change affecting warehouse workflows. Realistic ramp (e.g., 40/70/90% over three years) reduces early-year savings materially.
Discount rate. Using 10% instead of the 14% cost of capital inflates NPV. Recomputing at 14% lowers NPV and lengthens payback.
Implementation risk. Two failed deployments at comparable sites is a base-rate signal. The case should carry a probability-weighted scenario, not a point estimate.
Strategic necessity as a shield. 'Strategically necessary' is a reason to fund, not a reason to mis-model. The case should separate the strategic rationale from the financial forecast so each can be judged on its own terms.
Direction: every flaw makes the project look better than it is. The corrected NPV may still be positive, but the sponsor cannot know until the assumptions are honest.
2. The sponsor wants to proceed anyway. Recommend how the decision should be framed to leadership.
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Reframe the decision as a choice among options with explicit risk, not a yes/no on the sponsor's number.
Present: (a) the base case at the firm's 14% cost of capital with a realistic adoption ramp; (b) a downside case incorporating a failed-first-deployment scenario with a re-implementation cost; (c) the cost of delay or non-action.
Then state the decision question plainly: 'At a corrected NPV of $X with a Y% chance of implementation failure, do we fund this, fund a phased pilot first, or defer?' A phased pilot is often the right answer when implementation risk is the dominant uncertainty, because it buys information cheaply.
The key governance point: the sponsor should not be the sole author of the assumptions that justify their own project. Require independent review of adoption and discount-rate inputs.