When deciding to fund a project, a financial manager considers the Net Present V

Question

When deciding to fund a project, a financial manager considers the Net Present Value, the Internal Rate of Return, the Profitability Index, and the Payback Period. Yet there are other non-financial factors to consider like the momentum of the internal politics or the potential auxiliary gains from the project. Additionally, many managers claim that intuition plays an important role, especially in research and development projects. What do you think? To what extent would you rely on financial factors versus non-financial or intuitive elements in your decisions?

Explanation / Answer

Non-financial factors for investment appraisal

Although the financial case for making an investment is a vital part of the decision-making process, non-financial factors can also be important.

Key non-financial factors may include:

For example, you might need to take into account the environmental impact of a potential investment. To some extent, this may be reflected in financial factors, eg the energy savings offered by new machinery.

As well as the financial impact, your calculations should also consider any indirect effects. Identifying these soft benefits is often as important as the financial evaluation and may help your decision-making. Soft benefits could be:

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