MA: measuring performance (profit + investment centres)

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  • Created by: charlie
  • Created on: 29-05-17 15:33
ROI/ ROCE definition + equation (accepting decisions)
how much profit has been made in relation to the amount of capital invested/ Accepting decisions: COMPANY ROI>CoC/ DIVISION new ROI>old ROI
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ROI (profit after depn as % of net assets employed)/ +ves/ -ves
capital employed = NCA (nbv/net) + working capital/ +VES: value of assets falls over time/ -VES: disincentive to replace assets (inc ROI by depn of assets)/ difficulty to compare investment centres (older assets=misleading ROI)
2 of 10
ROI (profit after depn as % of gross assets employed)/ +ves/ -ves
capital employed = NCA (cost/gross) + working capital/ +VES: no change due to depn/ no disincentive to replace/ -VES: doesn't account for: higher service cost of older assets/ inflation + tech changes over time
3 of 10
ROI/ ROCE: controllability
ASSESSING MANAGERS: only use controllable contn + controllable assets by manager/ ASSESSING DIVISION: only use divisional profit, assets traceable to centre + share of HO assets to support division
4 of 10
ROI/ ROCE: +ves/-ves
+VES: comparative (%)/ measures profitability as how optimal was the utilisation of assets/ uses financial statements/ -VES: if linked to rewards ('massaging'+ lack of goal congruence)/ reject +VE LT profits due to -ve ST ROI (motivation problem)
5 of 10
RI definition + equation
measure of the centres profit (after depn) after deducting notional interest charge (usually calculated from CoC)
6 of 10
RI +ves/ -ves
+VES: RI inc when investments earning above CoC (good unless cash constraint)/ more flexible (higher CoC to more risky investments)/ -VES: absolute (not comparable so can't make strategic decisions)/ doesn't relate size of investment to profit
7 of 10
Imputed interest charge (r%)
% at which manager becomes indifferent on investment decision (NPV=0)
8 of 10
Solutions to disadvantages: use of economic income (over accounting income)
use difference in NPV (beginning + end)/ +VES: addresses ST dysfunction problem (e.g. reflecting ALL risks in 2008)/ -VES: theoretical/ inconsistent with IFRS/ LT risks will be included
9 of 10
Solutions to disadvantages: non-financial measures (BALANCE SCORECARD)
supplement with ST non-financial measures that critical to LT strategy (competitiveness/ productivity/ quality/ innovation)
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Other cards in this set

Card 2

Front

ROI (profit after depn as % of net assets employed)/ +ves/ -ves

Back

capital employed = NCA (nbv/net) + working capital/ +VES: value of assets falls over time/ -VES: disincentive to replace assets (inc ROI by depn of assets)/ difficulty to compare investment centres (older assets=misleading ROI)

Card 3

Front

ROI (profit after depn as % of gross assets employed)/ +ves/ -ves

Back

Preview of the front of card 3

Card 4

Front

ROI/ ROCE: controllability

Back

Preview of the front of card 4

Card 5

Front

ROI/ ROCE: +ves/-ves

Back

Preview of the front of card 5
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