A Good Base Case Does Not Mean a Robust Investment

Investment decisions are often assessed through the Base Case.

Does the investment meet the target IRR?

Is the NPV positive?

Does the expected return justify the capital invested?

These are necessary questions.

But they answer only one part of the investment decision.

An investment may meet every required financial criterion in the Base Case and still have very little room for error.

A small increase in CAPEX.

A delay in completion.

A lower exit value.

A higher financing cost.

Any one of these may be enough to push the investment below the investor's required return.

This is why sensitivity analysis should not only ask:

“What happens if this assumption changes?”

It should also ask:

“How far can this assumption change before the investment no longer meets the mandate?”

That point is the breakpoint.

And the distance between the Base Case and that breakpoint tells us something the Base Case alone cannot: how much room the investment thesis has before it fails.

Performance and robustness are therefore not the same thing.

A strong Base Case can be fragile.

A less spectacular Base Case may prove considerably more resilient.

Understanding that difference can materially improve an investment decision.

This reflection is based on my ongoing work on a Real Estate Investment Decision Framework designed to test investment theses under uncertainty.