Capital budgeting and plant capacity

Capital budgeting and plant capacity

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Article ID: iaor199269
Country: Netherlands
Volume: 21
Issue: 3
Start Page Number: 233
End Page Number: 241
Publication Date: Jul 1991
Journal: Engineering Costs and Production Economics
Authors:
Keywords: facilities
Abstract:

In this paper a model which explicitly recognizes the relationships between the plant capacity, the lead time for building the plant, and the discount rate used in evaluating the project, is developed. It is shown that the introduction of a discount rate which is a function of capacity, substantially alters the results obtained in a previous study where the discount rate is assumed to be constant. In particular, since the net benefits of an additional unit of capacity is discounted using a higher rate, the NPV is suppressed. An extensive sensitivity analyses on the nonmonetary and monetary parameters and their effect on the optimal plant size vs. optimal NPV is provided.

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