The Major Criticism of Using Return on Investment (ROI) for Evaluating

question 115

Multiple Choice

The major criticism of using return on investment (ROI) for evaluating the financial performance of business units considered investment centers is that ROI:

• A) Gives managers of profitable business units an incentive to reject some projects that would benefit the organization as a whole.
• B) Is not easily understood by managers.
• C) Usually uses a blended rate of capital as the required rate of return.
• D) Has a long-term (strategic) focus and therefore is not useful in terms of evaluating short-term performance.
• E) Favors large units (investment centers).

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Definitions:

Automatic Emotional Responses

Immediate and unconscious emotional reactions to certain stimuli or situations without deliberate thought.

Joseph LeDoux

A neuroscientist known for his work on survival circuits, including mechanisms of fear and emotion in the brain.

Cognitive Reactions

Mental processes as responses to external stimuli, involving perception, memory, judgment, and reasoning.

Emotional Reactions

The spontaneous and subjective feelings triggered by specific stimuli or events.