108 Financial Management
customer image, or companies in USA consider legal matters important in investment
analysis.
Due to the significance of qualitative factors, judgment seems to play an important role.
Some typical responses of companies about the role of judgment are:
l Vision of judgment of the future plays an important role. Factors like market
potential, possibility of technology change, trend of government policies etc.,
which are judgmental, play important role.
l The opportunities and constraints of selecting a project, its evaluation of quali-
tative and quantitative factors, and the weightage on every bit of pros and cons,
cost-benefit analysis, etc., are essential elements of judgment. Thus, it is inevi-
table for any management decision.
l Judgment and intuition should definitely be used when a decision of choice has
to be made between two or more, closely beneficial projects, or when it involves
changing the long-term strategy of the company. For routine matters, liquidity
and profits should be preferred over judgment.
l It (judgment) plays a very important role in determining the reliability of figures
with the help of qualitative methods as well as other known financial matters
affecting the projects.
We feel that what businessmen call intuition or (simply) judgment is in fact informed
judgment based on experience. A firm growing in a favourable economic environment
will be able to identify profitable opportunities without making NPV or IRR computation.
Businessmen often act more intelligently than they talk.Strategic Aspects of Investment Decision
Recently, a lot of emphasis has been placed on the view that a business firm facing
a complex and changing environment will benefit immensely in terms of improved
quality of decision-making if capital budgeting decisions are taken in the context of its
overall strategy. This approach provides the decision-maker with a central theme or
a big picture to keep in mind at all times as a guideline for effectively allocating
corporate financial resources. As argued by a chief financial officer: Allocating resources
to investments without a sound concept of divisional and corporate strategy is a lot like
throwing darts in a dark room.
A businessman argues as follows:
We have erred too long by exaggerating the ëimprovement in decision-
makingí that might result from the adoption of DCF or other refined
evaluation techniques. What is needed are approximate answers to the
precise problems rather than precise answer to the approximate problems