Bramer Corporation’s controller, Mara, was asked to prepare a capital investment

Question

Bramer Corporation’s controller, Mara, was asked to prepare a capital investment analysis for a robot-guided aluminum window machine. This machine would automate the entire window-casing manufacturing line. Mara has just returned from an international seminar on qualitative inputs into the capital investment decision and the value chain. She is eager to incorporate these new ideas into the analysis. In addition to the normal net present value analysis (which produced a significant negative result), Mara factored in figures for customer satisfaction, scrap reduction, reduced inventory needs, and reputation for quality. With the additional information included, the analysis produced a positive result for the investment. Do you think these other factors should be included in Mara’s analysis? Elaborate on why or why not.

Explanation / Answer

I believe the additional factors should not be added.

An NPV analysis is a projection of sum of expected future cash inflows over cash outflows, and it gives the dollar amount of net cash flow in discounted (time-weighted) terms. There by itself an element of uncertainty is present since the analysis is absed on projected data only. If, in addition, we include the non-financial estimates which are often subjective and subject to opinions or manipulations, the uncertainty factor widens and at the end, there may be a larger variation between actual result and NPV-projected result. Therefore, I do not agree with Mara's approach.

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