Question

With NPV and the other Capital Budgeting methods we are discussing this week they all consider quantitative factors or numbers when deciding on an investment/project.  What are some non quantitative factors or qualitative factors that also need to be considered (even if I was a former bean counter I do not believe you can put everything into numbers).

Answer 1

All though there are various qualitative factors that you consider(subjective) I'll list down the major ones:

1)Organization Strategy/Business Model/Culture - Capital investments can have an impact on the way work is performed in an organization. Like adding a second office maybe in a new city can change the equation. Changes like automation implementation may change the dynamics. So before making an investment decision, a manager should understand the effects the resource could have on the company's culture. Cultural aspects can come into play in such cases.

2)Comparative Advantage- What sort of proposition does the firm bring when compared with other competitors? Is the firm able to produce a good or service more efficiently than its competitors? resulting in better profit margins and a comparative advantage.
Example- Economies of scale, efficient internal systems, and geographic location can also create comparative advantage

3)Entry Barriers-Barriers to entry benefit the existing players already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors.
Examples of barriers to entry would include special tax benefits to existing firms, patents, strong brand identity or customer loyalty, and high customer switching costs.