Question

Some nonfinancial factors included in capital investment decisions are more important now than they were 20-25 years ago. Give some examples of the types of nonfinancial factors that managers would consider more important in today's capital investment decisions than they were in the past.

Answer 1

Today, there are some nonfinancial factors involved in capital investment decisions that are more important now than they were 20-25 years ago. Some examples of the types on non-financial factors that managers would think more important in today’s capital investment decisions than they were in the past include things such as the reputation of the organization, morale of employees, social responsibility of the organization, and connections with suppliers and customers. The reputation of a firm has become central to capital investment decisions. Capital investments that could enhance the firm’s reputation are favored over other projects. The decision to accept or reject a capital investment project also depends on the impression that the decision will have in regards to employee morale. That is, whether or not the company’s employees would want to be associated with such a project. The social responsibilities of the company have come to be extremely important in capital investment decisions. One aspect of this social responsibility is a company’s environmental obligations. The impact of capital investments on the environment is a very important non-financial factor that is considered while deciding upon a capital investment project. An environmental friendly project is favored over one that is harmful and/or damaging to the environment. There is strong evidence that poor environmental performance may affect stock prices, access to capital, cost of capital, and the reputation of the company (Epstein & Roy, 1997). Thus, managers need to evaluate how environmental considerations will affect their long-term positioning. Although a company’s relationships with its suppliers and customers were important 20-25 years ago, these relationships continue to become more important. Additionally, managers, today must consider the qualitative factors of ethics, protection, company culture, and product/service quality.