Under the Notion of Controllability, It Is Appropriate to Evaluate

question 7

Multiple Choice

Under the notion of controllability, it is appropriate to evaluate the profitability of each investment center based on each center's:

• A) Operating income before tax.
• B) Operating income after tax.
• C) Return on sales (ROS).
• D) Profit earned in relation to the amount of capital invested in the subunit.
• E) Return on equity (ROE).

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Definitions:

After-tax Cash Flows

The net amount of cash that remains after all tax liabilities have been deducted from a company's revenues.

Required Return

The lowest yearly percentage gain from an investment required to attract individuals or businesses to invest in a specific security or project.

Profitability Index

A calculation used in capital budgeting to determine the relative profitability of an investment, computed as the present value of future cash flows divided by the initial investment cost.

Crossover Rate

The crossover rate is the rate of return at which two projects have the same net present value (NPV), used in capital budgeting to compare the desirability of investments or projects.