Non-Financial Factors in Capital Investment Decisions

In addition to the financial aspects of the capital investment decision there are also many other areas which warrant attention such as:

Technical:

(a) The need for technical superiority.

(b) Flexibility and adaptability.

(c) Ease of maintenance.

(d) Operational considerations, e.g., need to restrain/recruit personnel.

(e) Servicing arrangements.

(f) Manuals provided for operating and servicing.

(g) Peripherals necessary for efficient operation or adding at some future date. It is not unheard of for an organization to purchase equipment and find that they are unable to use it without first buying certain peripherals.

Imported Equipment:

Exchange rates may affect the position dramatically depending upon the method of payment adopted. An important question which must be answered is ‘How good is the supplier’s servicing and availability of spares in the import country? It may be first class in the supplier’s own country but very poor in the import country.

Other considerations under this heading involve the following:

(i) The additional administration necessary to deal with the additional documentation and foreign exchange.

(ii) Delays caused in delivery of the equipment and spares by air and sea transportation problems and political instability.

Size and Weight of Equipment and Spares:

Floors may need strengthening and walls may have to be knocked down and rebuilt to accommodate the equipment. This possibility will affect the cash flows and should not be overlooked.

Standardization of Equipment:

The benefits of obtaining similar equipment from a tried and tested supplier can have profound consequences upon the financial analysis. Savings should be possible in the areas of operative training, ease of maintenance and inventory of spares, e.g., one component may fit several different machines.

Look Before You Buy:

It may well be worth the time and expense to actually inspect the equipment in a working environment. The opportunity to talk with operatives and personnel involved with such equipment should certainly not be neglected.

Human and Social Factors:

Firms who ignore such factors as safety, noise, fumes etc., in today’s complex and diverse business environment do so at their peril. The financial consequences of ignoring them could be catastrophic.

Organizational Behaviour:

The effects of ‘people problems’ upon an organization cannot and should not be underestimated.

This area alone could jeopardize the success of the whole venture of reasons such as:

(a) Resistance to change, e.g., introducing new technology.

(b) Empire building, e.g., where sub-unit goals conflict with the organization’s own goals.

(c) Perceptions about what the management want.

(d) Organizational structure, e.g., certain personnel may be in control key information junctions or have direct access to management.

(e) The board room balance of power, e.g., finance versus engineers.

There are, of course, numerous other factors that need to be taken into account, e.g., special offers – two for the price of one; guarantees; and the possibility of renegotiating the terms. Thus, the so called non-financial factors may have a significant influence upon a firm’s long-term financial performance and cannot be ignored in the capital investment decision making process.