Chapter 35 - Investment Appraisal
Learning Objectives: To understand the qualitative factors of investment appraisal
You have now learned many quantitative techniques for investment appraisal:
Simple Payback Period;
Discounted Payback Period;
Account Rate of Return (ARR);
Net Present Value (NPV);
Internal Rate of Return (IRR).
Most business will establish quantitative investment criteria that projects need to meet to be approved, for example:
Payback within three years;
Have an ARR higher than 15%;
Have NPV of at least 15% of the original investment.
However, even if all those criteria are met a project may still be rejected considering the qualitative factors of the investment:
The impacts of the project on the environment and local community:
- Concern with pressure groups and bad publicity;
- Potential damage to brand image;
- Long-term sales may be negatively impacted;
- CSR as an objective may be on the way.
Refusal of planning permissions:
- Governments may act on the best interest of local community and not approve a project;
Aims and objectives of the business:
- Quantitative metrics may be indicating that the best move is to move a bank customer service to online channels (cost-effective, profitable);
- The bank objective is to have outstanding customer service.
Impacts on the workforce:
- Pressure groups;
- Trade unions;
- Impacts on motivation.
Managers acceptability for risk:
- Different managers have different risk tolerance;
- Influenced by corporate culture;
- Influenced by previous experiences with similar projects.
Keep in mind that innovative projects are difficult to be measured quantitatively - novel product, business model, etc.
Exam Tip:
Unless the question asks only for an analysis of quantitative (numerical) factors, your answers to investment appraisal questions should include an assessment of qualitative factors too.
Final Considerations on Investment Appraisal Techniques:
Activity 35.6
To-Do-List: Decision-Making Question #2, Asia Print
Chapter 35 - Investment Appraisal
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