17. Explain how each of the following can lead to sub-optimal investment process: a) Relying on top-down idea generation; b) Managers being judged solely on accounting rate of return; c) A requirement that projects have a quick payback; d) Post-auditing once only, one year after completion; e) Post-auditing conducted by managers from 'rival' divisions; f) Over-optimism of project sponsors.

17. Explain how each of the following can lead to sub-optimal investment process: a) Relying on top-down idea generation; b) Managers being judged solely on accounting rate of return; c) A requirement that projects have a quick payback; d) Post-auditing once only, one year after completion; e) Post-auditing conducted by managers from 'rival' divisions; f) Over-optimism of project sponsors.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 4DQ: What is the major shortcoming of using operating income as a performance measure for investment...

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Similar questions

When a manager accepts a project because the net operating income from the investment exceeds the minimum acceptable profit based on required rate of return, the investment was evaluated based on _________ _________. (Enter only one word per blank.)
Which of the following statements regarding responsibility accounting systems is true? O Residual income is best used when evaluating the performance of profit centers rather than investment centers. An advantage of using return on investment to evaluate performance is that it encourages managers to increase both operating assets and operating income. O The use of residual income as a performance measure may lead segment managers to reject investments in projects that would be favorable for the company as a whole. O Residual income is a less effective metric for evaluating performance if there are significant differences in the size of the operating segments. O None of the above statements is true.
Is this statement ture or false? Requiring a relative short pay-back period for projects indicates a high risk avoiding propensity within the organisation
Internal Rate of Return is used: a) To determine the interest rate at which benefits of a project are equivalent to its costs. b) To determine which investment to choose when one of two alternatives must be chosen. c) To determine the interest rate for an investment that yields no income. d) To choose an investment that necessary to preserve the operation of the business. e) To justify a “lost-leader” project of a strategic nature.
1. The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing A. a labor union. B. a major investment. C. time or resource constraints. D. the election of a new board of directors. 2. Which rate-based decision statistic measures the rate of return, including the cost of capital for a project? A. Profitability Index, PI B. Net Present Value, NPV C. Internal Rate of Return, IRR D. Modified Internal Rate of Return, MIRR 3. When looking at these types of projects, one must consider any cash flows that arise from installing the new equipment. A. new B. cost-cutting C. incremental D. replacement E. all of the above. 4. Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive project? A. payback period B. net present value C. discounted payback period D. modified internal rate of return 5. The approach to convert an infinite series of asset…
7) Management may impose internal limits on investment expenditure despite the availability of positive NPV projects. What term is used for these limits? A) Divisible one-period rationing B) Hard capital rationing C) Soft capital rationing D) Indivisible one-period rationing
2.2.Briefly present to the senior management the limitations of using the weighted scoring model(weighting scheme). 2.3.Due to the limitations of the weighted scoring model (weighting scheme), briefly discuss how Coadycan use the following financial models for project selection.1. Net Present Value 2. Payback Analysis
A finance director has been asked to explain various methods of project appraisal to his board colleagues. The operations director has already explained to the maring director that: The payback method is a good evaluation tool as it takes into account the liquidity of an individual project The Internal Rate of Return (IRR) calculation is irrelevant as the company does not need to borrow funds for its future projects (1) (2) (3) (4) The Net Present Value (NPV) method is too complicated as various discount rates have to be tried until a zero NPV can be found The Accounting Rate of Return (ARR) would be a good method after the audited accounts are completed and the company's profit margin can be ascertained The finance director has decided he should first inform the managing director that his board colleague has not accurately explained the alternatives, as DA. only statement (1) is true B. only statement (2) is true only statement (3) is true one of the statements are true
Explain and give an example as to how a manager can manipulate the return on investment figure in the short run. Why are these manipulations bad for the company in the long run? Suggest some alternative performance evaluation and compensation schemes.
is this statement true or false? and why? Requiring a relative short pay-back period for projects indicates a high-risk avoiding propensity within the organisation
What is the major shortcoming of using operating income as a performance measure for investment centers?
Which of the following promotes goal congruence (aligned goals between segment managers and top management)? Residual Income as a performance evaluation measure O Return on Investment as a performance evaluation measure A positive residual income means O the investment has exceeded management's expectations based on their target rate of return. O the investment has not met management's expectations based on their target rate of return. O A positive or negative residual income does not tell us whether management's expectations were met.