As per (Akers, n. d.) one of the main disadvantages of net present value analysi

Question

As per (Akers, n. d.) one of the main disadvantages of net present value analysis is that it cannot be always 100 percent accurate due to the estimation that the management needs to have in terms of dollar amount of the projects’ costs and the future income of that project or investment which in the most cases difficult to estimate an accurate figures. Adding to that, any project will always incur some of unforeseen costs and risks which will definitely impact the profitability in a negative way, thus, including the non-quantitative factors is always advisable in such analysis to cover such gaps and to justify the inaccurate figures by emphasizing on intangible benefits to the organization such as the customer satisfaction and improving their quality standards. However, is there any other disadvantages you may think of in regards to depend solely on NPV analysis in projects’ section processes?

Helping bullet points can be :

- Reputation for Quality

- Customer satisfaction

- Scrap Reduction

- Reduced Inventory Needs

You can use your own heading or other point

Please give atleast 500 words in the answer

Explanation / Answer

Capital investment decisions are among the most critical strategic moves of a corporation. Qualitative factors should be included in such analysis. Customer satisfaction, scrap reduction, reduced inventory needs, and reputation for quality can affect the decision to purchase capital resources (William et al, 1975).

Decision makers must understand these types in order to take capital investment decisions. Reasons for inclusion in the analysis include:

Reputation For Quality

In order for company to increase the capacity of production they need to use capital investment. It is very clear that the quality of capital resources had a huge affect on the quality of capital production. Its inclusion would therefore ensure that the machine which will be finally considered for making the investment would help improve the quality of the firm’s products and services and itself is of high quality.

Customer satisfaction

The purchased capital equipment should be able to aid in offering products/services in a way that ensures customers satisfaction. Therefore, the inclusion of this factor in the analysis will ensure that the capital investment in a particular machine would in one way or another help improve customer satisfaction. (Fried, & Hisrich, 1994).

Scrap Reduction

Scrap reduction is the ability of the machine to reduce the amount of scrap resulting from production. The machine or the equipment that will be finally considered should be able to be effective in reducing the amount of scrap from processes. This would reduce costs of operations.

Reduced Inventory Needs

The new machine should be efficient and economical in the use of inventory .Therefore factoring this requirement will enable the finance managers to find out whether the machine should be bought or not. The machine should be able to fulfill this requirement for it to be a good capital investment decision.

Employee morale

Many a times organizations make investments with an intention to create a better work environment for its employees. For instance while doing NPV analysis of investing in new office furniture may not yield positive NPV figure only on the basis of the accounting and financial figures. But this investment will have a significant positive impact on morale of the employees. This, in turn, will lead to increased efficiency as well as productivity of employees within the organization.

Ancillary benefits

Take the example of a company like 3M that is on lookout of new and innovative products that have the potential to create new market niche in the future. Such companies focus strongly on innovation and make considerable investments in research and development (R&D). If only financial and accounting data are considered then majority of the investments in R&D projects will be rejected. But if the advantages and benefits and future potential of such investments and the resulting innovation is considered then the benefits will increase manifold.

References

William Petty, J., Scott Jr, D. F., & Bird, M. M. (1975). The capital expenditure decision-making process of large corporations. The Engineering Economist, 20(3), 159-172.

Fried, V. H., & Hisrich, R. D. (1994). Toward a model of venture capital investment decision making. Financial management, 28-37

(Total 508 words)

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