So much of the deliberation over capital projects revolves around the cost of money. If money is expensive- if you need to pay high interest rates in order to borrow money- a whole set of potential projects become untenable. Let’s say changing light fixtures will save $100 per year in electricity. The cost of the light fixtures is $1,000. With simple payback, saving $100 each year for ten years will pay back the initial $1,000 capital cost. Unless, of course, one must pay exorbitant amounts of interest on the $1,000 initial cost. Even if the money is not borrowed, one must make a decision about using $1,000 in the bank to buy new light fixtures or invest in securities. If one can keep the old light fixtures, pay the higher electricity bill, and make enough money off stocks to pay for the electricity, then from a financial point of view buying new light fixtures does not make sense.
For years, healthy returns on investment were the norm. One could talk about seven percent returns on investment. It was really important to invest early, because investments grew. That may not be the case any more.
Money is now cheap. Serious people, like central bankers, are talking about negative interest rates. Central banks are contemplating having people pay in order to deposit their money in the bank. How can this be? Well, if someone has a large amount of cash, and if that cash is going to depreciate at three percent as a security, then it is better to invest that cash where it loses one percent. You are still two percent better.
With money being this cheap, all sorts of capital projects become attractive. One does not need to worry about a healthy return on investment on a capital project. Free money that saves one percent on operating costs is a terrific deal. The benefit of doing these capital projects is not money saved. It’s the qualitative improvement that comes from the project. Projects are measured by their qualitative improvements such as enjoyability, increased user satisfaction, better outcomes.
Once our actions are no longer hostage to the financial considerations of significant interest rates, we can act more readily to improve the quality of our lives, and the quality of the lives around us. We may be finally moving past the age where the economic bottom line dwarfed the social and environmental bottom lines.