Non Financial Factors: Investment Proposal Essay

Question:

Discuss about the Non Financial Factors for Investment Proposal.

Answer:

Employee’s Satisfaction and their Motivation is one of the major non-financial factors. If the employees are not motivated and satisfied with their performances then the outcome expected from the production affect.
Changes in seasons or climates also affect the Investment Proposal evaluation. Global Warming increases day by the day which in turn effect the company decision of Investment in nature supportive and non supportive project. Sometime the companies have to investment in project which is not so profitable just to procure the interest of general public and their environmental needs.
Customer’s Satisfaction is necessary non financial factor as Customer are always supreme of every business and business has to take care of their needs utmost.
Manpower availability is required for new project as it demands more production and more production requires more labor to work so that the desired aim from investment cab is achieved.
Move of the Rival Business is also important while taking up any project. The actions also help the companies to taken decision in investment proposal that are non financial. Sometimes this factor helps the company to change its policy and procedure.
Rules and regulation imposed by Government also effect the decision of Investment in any project. Sometimes to get aid from government the companies invest in certain project like solar power plants etc.
Market Trends also affect the Project Evaluation. As positive trends increases the amount of Investment by any business in any particular period.
Net Present Value – NPV of an investment proposal is calculated by discounting the cash inflows back to the present at the required rate of return and there from subtracting the initial outlay. In other words, NPV is measured as difference between the present value of cash inflows and cash outflows. If the NPV is greater than zero then the project is accepted and if it is less than zero then the project is rejected. NPV having positive value increases the value of firm and which in turn increases the wealth of the investors. It is expressed in absolute terms. NPV method helps in decision making. A variation in the cash flow timing does not affect the NPV calculation and decision thereon taken by the investors.

Internal Rate of Return – Internal Rate of return is the rate at which an investment is repaid by the proceeds from the project. Mathematically, it is regarded as the rate of return at which the present value of cash inflows equals the present value of cash outflows. The IRR so calculated is compared with the required rate of return. The required rate of return is the minimum rate at which investor expects the firm will earn profit. If IRR is less than the required rate of return then the project is rejected otherwise accepted. Therefore, accepting the project with higher IRR will increase the wealth of the investors. It is expressed in percentage terms and does not help in decision making. A variation in the timing of cash outflow results in the various values of IRR which in turn makes difficult for decision making.

Comparing NPV and IRR – IRR May not be consistent to the Shareholders wealth maximization when compared to NPV

Both the methods are consistent with the objective of maximizing shareholders wealth. But two are not in correspondence with one another.

1. Mutually Exclusive Projects – If there are two independent projects, then the IRR and NPV will provide the same ranking and result and will increase the wealth of the shareholders. But in case of mutually exclusive projects, both the methods provide different rankings and IRR may not provide the ranking which may increase the wealth of the shareholders.

2. Multiple Rates of Return – The IRR method is affected by one major discrepancy that the method sometimes gives multiple rates of return for different projects. It happens when there is frequent increase or decrease in the cash inflows or sudden infusion of capital into the project.

3. Issue of Assumption of Reinvestment Rate - NPV assumes that the cash flows generated by the given project are reinvested at the cost of capital and IRR assumes that the cash flows generated are reinvested at the IRR. Thus, IRR assumption is based on the contingency of cash inflows and outflows of the given projects. As far as the rate of return is considered as the opportunity rate, the NPV method is more accurate though conservative but applies consistently to all projects.

References

Illes M., 2012, “Links between Net Present Value and Shareholder Value from a Business Economic Perspective”, Retrieved from accessed on 07-06-2016.

Edwards G, 2010, “Comparing NPV and IRR”, Retrieved from accessed on 07-06-2016.

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