Non-financial appraisal of investment decisions
There is evidence that many businesses, perhaps most of them, base their investment
decisions only partly on quantitative, financial assessments of each opportunity. Chen
(1995) surveyed 115 stock market listed, large US manufacturing businesses. He found
much the same popularity of the established financial appraisal methods as previous
US researchers. He also found heavy reliance on non-financial methods. Overall, the
discounting methods (NPV and IRR) were more popular than either PBP or ARR, but,
for all types of investment, non-financial methods ranked almost as highly as the
discounting methods, and well ahead of either PBP or ARR.
Alkaraan and Northcott (2006) found a similar state of affairs in the UK, with nonfinancial issues being regarded as very important by investment decision makers.
Non-financial methods here included such matters as whether the particular
investment under consideration fitted in with the general strategy of the businesses,
whether it seemed to have growth potential and whether the competitive position of
the product and the business would be improved.
It can be argued that these so-called non-financial issues are simply financial ones
that are particularly difficult to quantify. For example, a business would be keen to
invest in a way that fitted in with its general strategy because it believes that this will
tend to lead it into areas that are likely, in the long run, to be those with the greatest
wealth enhancement potential.