Investment Appraisal – Qualitative Factors
Investment Appraisal – Qualitative Factors
Investment appraisal provides a scientific decision-making technique for managers and can, if used appropriately, improve the quality of decisions. However, as financial data do not always show the full picture, firms should not base their decisions solely on investment appraisal results.
Qualitative Factors
• The aims of the organisation. A profit-making firm will focus on the results of a financial investment appraisal, with companies experiencing liquidity problems perhaps deeming the payback method to be the most relevant. On the other hand, a firm that places a high value on social issues might reject a profitable investment which is seen to exploit its workforce or damage the environment.
• Reliability of the data. Future costs and incomes will be influenced by the accuracy of market research and the ability to predict external changes. For more original investments and those of a longer duration, the predictions may be wildly inaccurate, undermining the use of investment appraisal.
• Risk. Highly profitable projects often involve high risk. A firm may prefer to choose a lower but more certain return. This will safeguard the company and avoid the possibility of upsetting shareholders if the risk does not pay.
• Production Requirements. The company must consider the compatibility of new machinery with its existing range. A firm may also be reluctant to deal with a new supplier if it enjoys a good service from its existing supplier. The availability of spare parts, the promise of just-in-time deliveries, or the general benefits arising from the goodwill of another company may all prove to be more important factors than a minor financial gain.
• Personnel. Will the new equipment or method suit the company staff? The ease of use, the level of training needed, the safety of the machine, the impact on the number of staff employed – these are all factors that should be considered. If these factors lead to a
Investment appraisal provides a scientific decision-making technique for managers and can, if used appropriately, improve the quality of decisions. However, as financial data do not always show the full picture, firms should not base their decisions solely on investment appraisal results.
Qualitative Factors
• The aims of the organisation. A profit-making firm will focus on the results of a financial investment appraisal, with companies experiencing liquidity problems perhaps deeming the payback method to be the most relevant. On the other hand, a firm that places a high value on social issues might reject a profitable investment which is seen to exploit its workforce or damage the environment.
• Reliability of the data. Future costs and incomes will be influenced by the accuracy of market research and the ability to predict external changes. For more original investments and those of a longer duration, the predictions may be wildly inaccurate, undermining the use of investment appraisal.
• Risk. Highly profitable projects often involve high risk. A firm may prefer to choose a lower but more certain return. This will safeguard the company and avoid the possibility of upsetting shareholders if the risk does not pay.
• Production Requirements. The company must consider the compatibility of new machinery with its existing range. A firm may also be reluctant to deal with a new supplier if it enjoys a good service from its existing supplier. The availability of spare parts, the promise of just-in-time deliveries, or the general benefits arising from the goodwill of another company may all prove to be more important factors than a minor financial gain.
• Personnel. Will the new equipment or method suit the company staff? The ease of use, the level of training needed, the safety of the machine, the impact on the number of staff employed – these are all factors that should be considered. If these factors lead to a