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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Zentra Foods, a listed manufacturer, is comparing two expansion options. Option A has a higher net present value but would require closing a plant in a town where Zentra is the main employer. Option B has a lower NPV and keeps the plant open. The board asks the finance director how to present the decision. Which approach best reflects sound strategic decision evaluation?

The board should receive the NPV figures alongside an assessment of non-financial factors such as reputation, employees and stakeholder reaction. Financial appraisal is necessary but incomplete, and strategic decisions need both quantitative and qualitative evidence so the board can weigh the trade-offs knowingly.

  1. AChoose Option A because the highest NPV always maximises shareholder wealth and non-financial matters should be excluded
  2. BPresent the NPV results together with an assessment of non-financial factors such as reputation, employee impact and stakeholder reaction, and let the board weigh themCorrect
  3. CChoose Option B because non-financial factors always outweigh financial returns
  4. DIgnore both options and rely on payback period because it is simpler to explain

Explanation

Financial analysis gives only part of the picture. The plant closure affects reputation, employee morale, community and stakeholder relations, which may change long-term value. Option A's NPV alone ignores these, while rejecting financial results entirely is also unsound.

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