Performance Measurement and Control — ACCA Practice Question 13

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Compare the project return (15%) to the current ROI (18%) to see the manager's view. Then compare the project return (15%) to the cost of capital (12%) to see the company's view (RI).

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B.The manager will reject the project under ROI, causing goal congruence issues, whereas RI would encourage acceptance.✓ Correct

Under ROI, the manager will reject the 15% project because it is lower than their current 18% ROI, and accepting it would lower their divisional average. However, the company wants the project because 15% is greater than the 12% cost of capital. Residual Income (RI) solves this: the project generates positive RI (15% - 12% = 3% spread), so a manager evaluated on RI would accept it, achieving goal congruence.

Common mistakes

Assuming managers will accept any project above the cost of capital when evaluated on ROI.

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Common mistakes

Practice the full ACCA PM — Performance Management Practice Exam 5

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