Scenario Allen Manesfield, Jenny Winters, and John Jacobsen have been discussing a persistent and irritating production problem. The three are employed by Honley Medical, which spe- cializes in the production of medical products and has three divisions: the IV Products Divi- sion, the Critical Care Monitoring Division, and the Specialty Products Division. Allen, Jenny, and John are associated with the IV Products Division Solution Questions to Think About 1.     What role, if any, should qualitative factors play in capital budgeting decisions? Quantitative factors can be precisely measured in numerical terms, while qualitative factors are measured subjectively. Capital investments -- whether large, one-time purchases of facilities or productive equipment, investments in labor or assets purchased for profitable appreciation -- are generally driven by quantitative factors, such as price and an expected return on investment. However, managers today must consider a range of qualitative factors when making capital investment decisions. Ethics, safety, company culture and environmental concerns can affect the decision to purchase capital resources. Understanding these types of qualitative factors is part of making well-informed capital-investment decisions. 2.     How do we measure the financial benefits of long-term investments? Generally ROI is used to measure the performance of a long term investment. Under this method all revenues over the life of the assets are converted to Present Value of Revenue and All expenses including the investment are converted into Present Value of Expenses.Net Present Value is the calculated by subtracting Present Value of Expenses from Net Present Value of Income. If NPV is >0 then invested to the project else rejected. It is possible to measure Payback period which mean time at which project returns the original investment. 4.     What role do taxes and inflation play in assessing cash flows? Taxes play an important rolebecause they affect both the amount and the timing of cash flows. Inflation reduces the real value of money. So future revenue or future expenses discounted at present value does not show the effective Net Present Value for investment decision until inflation has been taken into calculation. 5.     Should the cash flows of intangible factors be estimated? Intangible factors does not produce any cash. It is a qualitative factor. Hence should not be considered into cash flows. .

1. Scenario
Allen Manesfield, Jenny Winters, and John Jacobsen have been discussing a persistent and
irritating production problem. The three are employed by Honley Medical, which spe- cializes in
the production of medical products and has three divisions: the IV Products Divi- sion, the
Critical Care Monitoring Division, and the Specialty Products Division. Allen, Jenny, and John
are associated with the IV Products Division
Solution
Questions to Think About
1.    What role, if any, should qualitative factors play in capital budgeting decisions?
Quantitative factors can be precisely measured in numerical terms, while qualitative factors are
measured subjectively. Capital investments -- whether large, one-time purchases of facilities or
productive equipment, investments in labor or assets purchased for profitable appreciation -- are
generally driven by quantitative factors, such as price and an expected return on investment.
However, managers today must consider a range of qualitative factors when making capital
investment decisions. Ethics, safety, company culture and environmental concerns can affect the
decision to purchase capital resources. Understanding these types of qualitative factors is part of
making well-informed capital-investment decisions.
2.    How do we measure the financial benefits of long-term investments?
Generally ROI is used to measure the performance of a long term investment. Under this method
all revenues over the life of the assets are converted to Present Value of Revenue and All
expenses including the investment are converted into Present Value of Expenses.Net Present
Value is the calculated by subtracting Present Value of Expenses from Net Present Value of
Income. If NPV is >0 then invested to the project else rejected.
It is possible to measure Payback period which mean time at which project returns the original
investment.
4.    What role do taxes and inflation play in assessing cash flows?

2. Taxes play an important rolebecause they affect both the amount and the timing of cash flows.
Inflation reduces the real value of money. So future revenue or future expenses discounted at
present value does not show the effective Net Present Value for investment decision until
inflation has been taken into calculation.
5.    Should the cash flows of intangible factors be estimated?
Intangible factors does not produce any cash. It is a qualitative factor. Hence should not be
considered into cash flows.