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. 

As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to:

Your personal experiences. Reflect on how this assignment topic is applicable to and will benefit you.

Course readings and any external readings.

Discussion forum posts or other course objectives.

Answer 1

Keeping everything aside, any capital budgeting decision involves two major aspects QUALITATIVE and QUANTITATIVE

Although a little more difficult to analyze, the qualitative factors play and equally important role. These cannot be quantified but these can tell whether a particular factor will have a positive or a negative impact.

1. ENVIRONMENTAL FACTORS

The first and foremost are the environmental factors. A business operates in the society using the resources available in the nature. In such scenarios, it becomes a moral obligation to give something in return. If a particular investment results in harming the environment, a company MUST NOT take up such opportunity.

Even if the QUANTITATIVE factors give decision in favor of the project, in case the project results in harming the environment and any of its resources the project MUST NOT be taken up.

2. QUALITY OF THE PRODUCT

If due to accepting a new project the quality of the other product of the company goes down, the project must not be accepted. A short term or one time benefit cannot justify long term issues that might be cause due to deteriorating quality of other products. If the quality goes down, it takes the reputation of the company down with it.

3. MORALE OF THE EMPLOYEES

There may be scenarios like creating a Break room for the employees of the company which may result in negative cash flow but may be very important in the long run.

Creating such rooms may help to boost the morale of the employees and result in increased productivity which in turn would result in increased profitability of the company.