Learning objectives of this
article:
-
What are the qualitative considerations in
capital investment analysis?
-
Explain the importance of qualitative factors in
capital investment analysis.
There are various methods of capital investment
analysis that focus on quantitative aspects. Some
popular methods are average rate of return, cash
payback, net present value and internal rate of
return method. Some of these methods focus on
present values and some ignore it.
However, some benefits of capital investments are
of qualitative nature. These benefits cannot be
readily estimated in dollar terms. If management
does not consider these qualitative considerations,
the quantitative analysis may suggest the rejection
of a worthy investment.
Example of
Strategic Investment:
Nucor decided to be the first to invest
in a new continuous casting technology
that had the potential to make thin
gauge sheet steel and thus open new
product markets. This new investment was
justified more on the strategic
importance of the investment than on the
economic analysis. As it turned out, the
investment was very successful. |
Qualitative considerations in capital investment
analysis are very important for strategic
investments. Strategic investments are those that
are designed to affect a company's long term ability
to generate profits. Frequently, strategic
investments have many uncertainties and intangible
benefits. Unlike capital investments that are
designed to cut costs, strategic investments have
very few hard savings. Instead they may affect the
future revenue generating capabilities of the
organization.
Capital investment analysis may be influenced by the
following qualitative considerations:
- product quality
- manufacturing flexibility
- employee morale
- manufacturing productivity
- manufacturing control
Today's manufacturing environment is
characterized by investments in redesigning the
manufacturing process and implementing manufacturing
system such as just-in-time manufacturing and
computer integrated manufacturing. In this
manufacturing environment, qualitative factors may
be especially important in capital investment
analysis.
John H. McConnell, Chairman of Worthington
Industries best summarized the importance of
considering qualitative aspects of capital
investments. He stated, "We try to find the best
technology, stay ahead of the competition, and serve
the customer...We'll make any investment that will
payback quickly...but if it is something that we
really see as a must down the road, payback is not
going to be that important."
Joseph Morone and Albert
Paulson, "Cost of Capital: The managerial
Perspective," California Management Review (Summer
1991), pp. 9-32.
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