BUS 5110 Managerial Accounting

University of the People

BUS 5110 Managerial Accounting
Portfolio Assignment 6
 BUS 5110 Managerial Accounting

Capital budgeting is “the process a business undertakes to evaluate potential major projects or
investments. Construction of a new plant or a big investment in an outside venture are examples
of projects that would require capital budgeting before they are approved or rejected” [ CITATION
WIL191 \l 1033 ], The capital budgeting decision includes two main characters Qualitative and
Quantitative, Although it is a little challenging to examine, the qualitative determinants play an
equally significant role. Such determinants cannot be quantified but can ascertain whether a
selective factor will have a negative or a positive impact (Lumen Learning, n.d.).

Qualitative factors are decision outcomes that cannot be measured and such factors cannot be
quantified in terms of money which include employee's morale, customers, investors,
Community, Products etc [ CITATION Qua18 \l 1033 ]. Below are three of the main Qualitative
factors impacting capital budgeting decision:

1) Environmental and community/ Neighbourhood factors

The primary and principal determinant includes environmental factors. Since business functions
in society using the resources available in nature. In such situations, it becomes a moral
responsibility to give something in return to society. If specific investment results in hurting the
environment, a firm should not take up such an opportunity, even if the quantitative factors give
a decision in support of the project.

Furthermore, community and Neighbourhood reception is represent one of the main Qualitative
factors affecting and impacting capital budgeting decision, for example, if your capital
budgeting decision about building new building in Neighbourhood, so it’s "How will your new
building be greeted by local residents?" or "How will any changes I make to this existing
building be greeted by local residents?"

Even global tech companies that have come barrelling into towns with promises of employing
thousands of people have been stopped in their tracks by fierce objections from residents. They
often conduct their own qualitative investment appraisal, sometimes deciding that factors such as
more noise, lights, traffic and pollution aren't worth the financial rewards. Residents can be won
over, but even companies with deeper pockets than many small businesses have discovered: the
concessions don't come cheaply.
 BUS 5110 Managerial Accounting

I remember what happened with the Snapchat company, when it faced a resistance by the local
residents about renting building in their Neighbourhoods and they said that made the rents of the
buildings and apartments very high and affecting them.

2) Product Quality

It's also one of the most important qualitative factors in investment decisions since it could breed
either compatibility or set you on a collision course if your goal is to make a product of the
highest quality while your potential investment choice emphasizes cost-cutting. It's what
Investopedia calls "integration risk," or when integrating two operations looks a lot better on
paper than it turns out to be in practice. You can avoid this risky business by making the changes
your due diligence uncovers. 

For example, If the acceptance of new project results in the poor quality of the other product, in
such a situation the firm may go down, thus the project should not be accepted. A short-term
advantage cannot warrant long term issues that might be caused due to the deteriorating status of
other products. If the quality goes down, it results in reduced goodwill of the firm.

3) Corporate culture and Employee's Morale

Corporate culture, or the underpinning values and beliefs that define an organization or group of
people. Like other qualitative factors, you cannot measure culture in monetary terms, but you
sure can get a feel for it by finding out how people approach their work, how they interact and
solve problems and what motivates them to improve. If this sounds like a code for "morale,"
you're half right.

Productivity often supplies the other half since productive employees are almost always satisfied
employees. More than any other contributor, values form the cornerstone of a corporate culture,
and it's worth considering other things that spring from this foundation, such as employee
camaraderie (or the lack of it), teamwork (or the lack of it) and cohesiveness. A culture clash is
one of the primary reasons that many capital investments (and mergers) fail[ CITATION WIL191 \l
1033 ].
BUS 5110 Managerial Accounting

Another example, if company planned to build a Restroom for the employees of the firm which
may result in negative cash flow but may be very important in the long run. Building such rooms
help to raise the morale of the employees and result in grown productivity which ultimately
increases the profitability of the firm.

Reference;

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from

https://2012books.lardbucket.org/books/accounting-for-managers/index.html

KENTON, W. (2019, June 6). Capital Budgeting. Retrieved from Investo Pedia:
https://www.investopedia.com/terms/c/capitalbudgeting.asp
Lumen Learning. (n.d.). The relationship between risk and capital budgeting. Boundless
Finance. Retrieved from https://courses.lumenlearning.com/boundless-finance/chapter/the-
relationship-between-risk-and-capital-budgeting/
Qualitative factors. (2018, October 28). Retrieved from Accounting Tools:
https://www.accountingtools.com/articles/2017/5/8/qualitative-factors