ExpertMedium2 marksMultiple Choice
ACCA · Question 13 · Performance measurement and control
Section A
The manager of Division X is evaluated based on Return on Investment (ROI). The division currently has an ROI of 18%. The company's cost of capital is 12%. The manager is considering a new project that yields a return of 15%.
Which of the following statements is true regarding the manager's likely decision and its alignment with goal congruence?
Section A
The manager of Division X is evaluated based on Return on Investment (ROI). The division currently has an ROI of 18%. The company's cost of capital is 12%. The manager is considering a new project that yields a return of 15%.
Which of the following statements is true regarding the manager's likely decision and its alignment with goal congruence?
Answer options:
A.
The manager will accept the project, leading to goal congruence.
B.
The manager will reject the project, leading to a lack of goal congruence.
C.
The manager will accept the project, leading to a lack of goal congruence.
D.
The manager will reject the project, leading to goal congruence.
How to approach this question
Compare the project return to the current ROI (manager's perspective) and to the cost of capital (company's perspective).
Full Answer
B.The manager will reject the project, leading to a lack of goal congruence.✓ Correct
The manager will likely reject the project because its 15% return is lower than the current divisional ROI of 18%; accepting it would drag down the manager's performance metric. However, the company wants the project accepted because its 15% return exceeds the 12% cost of capital. This mismatch causes dysfunctional behavior and a lack of goal congruence. Residual Income (RI) would solve this.
Common mistakes
Assuming managers always accept projects above the cost of capital when evaluated on ROI.
Practice the full ACCA PM — Performance Management Practice Exam 6
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