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non monetary and financial factors of investment appraisal

Updated on May 8, 2011

INVESTMENT APPRAISAL

 

Investment appraisal or capital budgeting is the process of evaluating a project for its economic viability. Many methods of investment appraisal exist – ranging from ordinary payback period to sophisticated computer programs used for investment appraisal in today’s business world. You need to only commit your money or your company’s money to projects that have the potential of bringing in profit for the business. Unless you are running a not for profit organization, some of them even make more profit than most for profit firms out there. Hehehe. As important and capital budgeting is, business investment decisions cannot be purely based on it, there are other soft aspect of the investment appraisal that needs to be thoroughly looked into. And that is the subject matter of this hub. So enjoy!

IMPORTANCE OF NON-MONETARY AND NON-FINANCIAL FACTORS IN INVESTMENT APPRAISAL OR CAPITAL BUDGETING PROCESSES

A lot of people don’t pay attention to non- monetary and non-financial factors of investment appraisal process. Unknown to this group of people is the fact that some of these non- financial factors carry more weight than the so-called financial parameters of investment appraisal. Non financial investment appraisal factor can reduce an already established business empire from hero to zero if not carefully handled.

NON FINANCIAL INVESTMENT APPRAISAL FACTORS

  • Workers motivation and lack of motivation: no matter how financially viable a project is, it can never see the day light if the work force that are the working force of the project did not motivation in the project. It is only when the workers are motivated by a project and its outcome that the project will succeed. I am not talking about selfish interest of some unscrupulous workers here. I am talking about a situation where workers really got worried over their fate as a result of the project being embarked on by management. They may be afraid of losing their means of livelihood if a project sees that light of the day for example.
  • Psychology of the immediate external environment of a business: the immediate external environment of a company will simply revolt when they feel that the outcome of a major project about to be embarked on by a company will cause them more harm than good. A typical example is the reaction of the people of OSUN state in Nigeria when a company already existing there wanted to build a tobacco plant. The people felt that the establishment of a tobacco plant in their community will lead many of their children astray.
  • Government actions and inactions: good managers always consider the consequences of government actions and inactions on any project they want to execute. You invest in some projects that are financially not viable just to meet government requirements.
  • Viral and back-end effect: some loss making projects are carried out if they will help the company achieve success in other areas of the business that when aggregated will outweigh the losses incurred from the failing project(s).
  • Green implication: there are projects that are executed by some companies just to keep our environment habitable. Now that everyone is preaching about GREENIZATION (involving in green activities as many times as you can), it will be inhumane and unthinkable for anyone to make any investment without first of all considering the green implication of the project.

Public image and opinion: companies sponsor programs that they would otherwise not sponsor just to build their public image. Am not talking about some reality shows that most company purport to sponsor these days as some reality shows give them more money than most commercial activities. But, real programs undertaken by companies with the interest of people at heart.

CONCLUSION

For a manager to be successful in this crazily dynamic business environment of today, he or she must understand the psychology of non-financial investment appraisal. Non-monetary and non-financial factors of investment appraisal are necessary element of any worthwhile investment appraisal activity that any serious company should look into.

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