Financial and Non-financial Factors in Investment Appraisal

This document discusses the financial and non-financial factors that impact the decision-making process of investment appraisal in an organization. It explores the use of these factors to evaluate profitability and growth prospects. The document covers topics such as time value of money, cash flows, return on investment, technological development, availability of skilled personnel, and duration of the project.

AMASSMENT

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................1
Financial Factors..........................................................................................................................1
Non-financial Factors...................................................................................................................1
REFERENCES................................................................................................................................2

MAIN BODY
There are some financial as well as non-financial factors that impact the decision-making
process of investment appraisal in an organization. The financial factors are concerned with use
of money and are quantifiable in nature. Whereas the non-financial factors are qualitative and
cannot be measured in terms of money. Both of these factors are being used to evaluate the
profitability and growth prospects in relation to the project and their applicability for the business
operations. These are some factors:-
Financial Factors Time value of money- The time value of money is a major financial factor that impacts
the investment appraisal decisions in a company. In the various techniques of capital
budgeting the cash flows that are to be generated over the passage of time are discounted
to the present value, to take the accept-reject decisions (Shaeri, Adaoglu and Katircioglu,
2016). It fosters comparison between the proposals and selection of the most profitable
alternative. Cash flows- The cash inflows that shall be generated over the duration of the project are
used to determine the profitability and growth prospects of the proposal. They have a
higher correlation with the maximization of shareholder's wealth, which is a significant
objective for any organization. The flow of cash shall also be responsible for the liquidity
position of the company.
 Return on investment- The ultimate purpose of conducting the investment appraisal is
maximizing the returns that are earned by the company. The higher is the ratio of returns
on investment, the better is the proposal for the company (Luhn and etal., 2017). The
long term capital budgeting decisions involve lot of risks and uncertainties which are
undertaken for achieving higher returns on the investment made by the company.
Non-financial Factors Technological development- The investment appraisal decisions are generally with
regard to the advancement in the technology of production. This drives the company to
undertake various new projects and take the first mover advantage (Bogićević,
Domanović and Krstić, 2016). This will build competitive advantage in the market, such
that company can prosper and achieve its organizational objectives.
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 Availability of skilled personnel- In order to successfully implement the project and
derive benefits from it, the company needs to hire skilled personnels who are possessing
the expertise, experience and required knowledge to capitalize on new project. It is
important to assign appropriate roles to the human resource in the organization in order to
avoid damages or unnecessary wastages. The proper allocation of the human capital shall
be beneficial in generating returns for the business.
 Duration of the project- The duration of the project is also the prominent factor that is
used to assess the profitability and future growth that is associated with a project. The
relevant costs that are undertaken and its simultaneous profitability are the key
determinants to judiciously decide upon whether a deal should be accepted or not by the
organization (Johnson and etal., 2017). The value of the asset is depreciated over its life
which is also required in applying the techniques of investment appraisal.
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REFERENCES
Books and Journals
Shaeri, K., Adaoglu, C. and Katircioglu, S. T., 2016. Oil price risk exposure: A comparison of
financial and non-financial subsectors. Energy. 109. pp.712-723.
Luhn, A. and etal., 2017. An evaluation of knowledge management system's components and its
financial and non-financial implications. Entrepreneurship and Sustainability
Issues. 5(2). pp.315-329.
Bogićević, J., Domanović, V. and Krstić, B., 2016. The role of financial and non-financial
performance indicators in enterprise sustainability evaluation. Ekonomika. 62(3). pp.1-
13.
Johnson, O. and etal., 2017. Catalysing investment in sustainable energy infrastructure in Africa:
Overcoming financial and non-financial constraints. Stockholm Environment Institute..
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