Executive SummaryWhile the finance discipline focuses on the added value of a capital investment project to the firm's assets (NPVA), the real estate discipline typically looks at the impact on the firm's equity investors (NPVE). The two approaches will generate the same value provided that the project and the firm are equally leveraged. However, if the project's capital structure differs from that of the firm, NPVE will differ from NPVA. This study explores the effect of different capital structures for the project and the firm in three scenarios—a single-year project, a project generating a single cash flow multiple years into the future, and a project generating multi-year cash flows— and the resultant discrepancy between NPVE and NPVA. Using two adjustment routes, we show that NPVE can be recalculated to equal NPVA in each scenario, although the adjustment process is complicated, particularly in the more complex scenarios.
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Rich et al. (2018) studied this question.