ExpertACCA · Question 14 · Performance measurement and control
Section A
Horizon Hotels evaluates its regional managers using Return on Investment (ROI). The Northern region currently has an ROI of 18%. The manager is considering a new project that requires an investment of $500,000 and will generate an annual controllable profit of $80,000. The company's cost of capital is 12%.
How will the project affect the manager's ROI, and will they accept it if evaluated solely on ROI?
Section A
Horizon Hotels evaluates its regional managers using Return on Investment (ROI). The Northern region currently has an ROI of 18%. The manager is considering a new project that requires an investment of $500,000 and will generate an annual controllable profit of $80,000. The company's cost of capital is 12%.
How will the project affect the manager's ROI, and will they accept it if evaluated solely on ROI?
Answer options:
Project ROI is 16%; Manager will accept it because it exceeds the cost of capital.
Project ROI is 16%; Manager will reject it because it lowers their current ROI of 18%.
Project ROI is 20%; Manager will accept it because it increases their current ROI.
Project ROI is 12%; Manager will be indifferent.
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