Question

Please describe three qualitative factors that can affect capital budgeting decisions. Illustrate situations where those qualitative factors would cause a decision to be made that is against the quantitative analyses (i.e., calculations say to accept, but management does not and vice versa). Be specific.

Answer 1

Three qualitative factors include:

1. Manufacturing facilities: At times the NPV and IRR may yield negative quantitative results may not support investing in new facilities but it may be important for the company to present itself as an innovator in the industry and create a market niche for itself.

2. Environmental factors: Taking up new projects cause high environmental damages and investing in measures to negate the factors may not always yield positive cash flows and overall NPV for the project. But it is essential for the management to consider the social benefits and do overall good for the society.

3. Market opportunities: The project undertaken might require setting up of new stores, carry out promotional activities to increase the sales and in turn the revenues for the business and create a bigger market for the organization. The figures for may not support additional expenditure must will definitely add to the brand value of the business which cannot be measured in real terms.