Capital investment decisions, often abbreviated as CAPEX in finance, are among the most critical strategic moves of a corporation. CAPEX decisions involve when, where and how much to invest in order to acquire fixed assets, such as buildings, factories or warehouses. Understanding the qualitative factors that go into the decision-making process will help you decipher the thinking process of companies and make you a better investor.
Qualitative vs. Quantitative Inputs
CAPEX decisions depend on both qualitative and quantitative factors. Anything that can be expressed in numbers is a quantitative factor. Expected future inflation rate, the percentage growth in demand for the product to be manufactured in a future factory and the interest rate at which the company can borrow to purchase a parcel of land are typical quantitative factors. Decisions inputs that are either hard or impossible to express in numbers are qualitative factors and are just as important. Business literature sometimes refers to these as "soft factors," since they are less concrete and more open to interpretation.
How the views of society will change over time is a key qualitative consideration in CAPEX decisions. If consumers likely will prefer more "green" products over coming years, it wouldn't be wise to build a factory spewing brown smoke from giant chimneys, for example. Similarly, the fabrics that are expected to be trendy ten years from now, must be considered when building a factory to produce garments. Social trends also influence how many hours workers will be willing to work in the future and what kinds of jobs they will be willing to do for a given salary, which also influence what types of manufacturing facilities are best.
Business papers and magazines sometimes read like political publications and dissect every move in Congress, because political decisions matter in how business is run. How exports and imports will be taxed by Congress, for example, often is the single biggest factor when determining the location of a factory. How such numerical inputs as tax rates and minimum wages will shape up depend on qualitative factors based on political decisions. Rising nationalistic sentiment, a broad political reaction to a specific international conflict and similar "soft" inputs play a role in which party will rule in the future and what decisions it might make.
Often a decision that might make sense based on hard figures fails to yield the desired result because it is incompatible with the corporate culture. The speed with which a business can act, how hard its employees desire to work and how it deals with failure all matter. Some corporations excel at providing quality at a premium price because they employ experienced and meticulous individuals who take pride in their work. Such a business should think twice before investing in a factory designed to manufacture large numbers of cheap items, for example.
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