Capital-investment Appraisal

Many of the techniques used in the appraisal of capital investment have been evolved by large capital-intensive industries. The chemical industry, for example, which typically has to invest large sums of money in highly complex plants that have a relatively limited life, has led the way in the development of methods of investment appraisal that are thought to be more soundly based and more realistic than traditional simple methods. The chemical industry is, of course, a major customer of the construction industry, others being property-development companies, manufacturing industry, local and central government. The attitude to return on capital in these various industries differs widely depending on the nature of the investment. A company building a chemical plant that has a limited life, will seek not only to recover the cost of the construction in a short period but will also be seeking to make an acceptable profit from the investment. In the area of property development it is unlikely that the developer will be seeking to recover the original capital cost since the value of property such as shops and offices will almost certainly continue to appreciate. In these circumstances the developer may be happy to accept a relatively low return on his investment in anticipation of capital appreciation, and in fact there have been many examples where virtually no return on capital has been achieved, for example, in the case of office blocks that have been allowed to remain empty in central London.