Appraising logistics center investment: don't just look at IRR

A financial model can show an attractive IRR and still hide major risks: slow volume ramp-up, insufficient working capital, underestimated operating costs, or a phase two that must be funded before phase one generates enough cash. Appraising a logistics project requires linking the operating model to cash flow rather than looking at a single bottom-line metric.

Start with the revenue generating unit

Revenue must be built from real services: pallet-days, m²-months, TEU throughput, truck trips, tons handled or value-added fees. Each service has different capacity, price, utilization rate and seasonality. Combining them all into a single occupancy rate makes the model hard to verify.

CAPEX must follow the disbursement schedule

Land, site grading, warehouses, yards, roads, fire protection, power, equipment, software, consulting, interest during construction, contingency and working capital need to be separated over time. Two options with the same total investment but different disbursement schedules will create different capital needs and financing costs.

OPEX needs to reflect how the building operates

Staff, electricity, fuel, maintenance, land lease, insurance, software, security, environmental treatment and sales costs must be linked to volume or capacity. For cold storage, electricity and maintenance play a different role than in regular warehouses; for ICDs, equipment and container rehandling can drive costs up quickly when the yard is too full.

The four indicators must be read together

NPV shows the additional present value created at the selected discount rate. IRR is the discount rate that makes NPV equal to zero but can be misleading when cash flows are unusual. Payback period indicates how long capital is tied up. DSCR or debt repayment capacity checks whether the project has enough cash flow to meet its obligations in each period. No single metric can replace the other three.

Break-even capacity is more important than design capacity

Design capacity says how much the facility can handle; break-even capacity says how much must be sold to cover costs. The project owner should know the break-even occupancy rate for each phase and how many months of cash the project can withstand if leasing is slower than planned.

Phase investment by threshold, not by fixed year

Instead of writing “build phase two in year three”, set thresholds such as occupancy rate, truck waiting time, equipment utilization or signed contracts. Operating thresholds help avoid investing too early, while leaving enough preparation time before phase one is actually overloaded.

Three minimum scenarios

Base case: customer ramp-up and prices based on the most likely data. Downside: slower ramp-up, lower prices, higher CAPEX and higher interest rates. Growth: high volumes, but additional investment is needed early. Each scenario should show the point of peak funding shortfall, not just the end-of-period IRR.

Sensitivity analysis to find variables worth managing

There is no need to change every cell in the spreadsheet. Focus on 5–7 influential variables: volume, rent or fees, CAPEX, start of operations, electricity and fuel costs, dwell time and cost of capital. The variable that turns NPV negative fastest must become a condition in the investment decision or contract.

What a good report delivers

A report does more than conclude whether the project is viable. It must indicate the scale to invest, the conditions for achieving returns, stop or expansion milestones, capital needs by period and the data that should continue to be tracked. The financial model then becomes a project management tool after approval.

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