Brookings Company Evaluates Its Managers on the Basis of Return

question 136

Multiple Choice

Brookings Company evaluates its managers on the basis of return on investment.Division Three has a return on investment (ROI) of 15%,while the company as a whole has an ROI of only 10%.Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

• A) ROI.
• B) Residual income.
• C) Both ROI and residual income will motivate the manager to accept the project.
• D) Neither ROI nor residual income will motivate the manager to accept the project.

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Definitions:

Present Value

The value today of a sum of money or future cash flows, taking into account a specific rate of return.

Future Cash Flow

The projected movement of money into and out of a business or investment over future periods.

Avoidable Costs

Expenses that can be eliminated if a particular decision is made or if a business operation is discontinued.

Future Costs

Costs that have not yet been incurred but are expected to be spent in the future for operational or investment purposes.