Qualitative Factors and Projections of Future Cash Flows
As much as accountants hate to admit it, some things in life just can’t be measured. Projections of future cash flows, for example, inherently ignore certain factors that can’t be monetized — qualitative factors, such as the following:
Better customer loyalty
Stronger employee morale
Environmental protection and preservation
Ignore these kinds of factors at your peril.
For example, say you’re evaluating a new factory expansion project and arrive at a negative net present value (NPV), causing you to reject the project. But the new expansion would have saved the company from outsourcing jobs overseas, helped employee morale, and improved community relations.
Evaluating such qualitative factors when making decisions requires a measure of personal judgment, which is different for every decision-maker. If employee morale is important to you, you may choose to expand the factory in spite of the negative NPV.
When looking over the numbers for any capital project, think beyond the immediate profit-and-loss scenarios and consider other factors that are likely to indirectly impact the success of your business.