After studying this chapter, you will know: Explain the use and limitations of return on investment (ROI) for evaluating investment centers, explain the use and limitations of residual income (RI) for evaluating investment centers, explain the use and limitations of economic value added (EVA®) for evaluating investment centers,. | Strategic Performance Measurement: Investment Centers Chapter Nineteen McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 19-2 Part One Explain the use and limitations of return on investment (ROI) for evaluating investment centers Explain the use and limitations of residual income (RI) for evaluating investment centers Explain the use and limitations of economic value added (EVA®) for evaluating investment centers Learning Objectives 19-3 Learning Objectives (continued) Part Two Explain the objectives of transfer pricing, and the advantages and disadvantages of various transfer-pricing alternatives Discuss important international issues that arise in transfer pricing 19-4 Investment Centers Many firms use profit centers (Chapter 18) to evaluate managers, but firms cannot use profit alone to compare one business unit to other business units because of: Differences in size Differences in operating characteristics To evaluate the financial performance of investment centers, we need to somehow incorporate the level of invested capital into the performance measure 19-5 Financial Performance Measures for Investment Centers Strategic objectives for financial-performance measures for investment SBUs are: Motivate managers to exert a high level of effort to achieve the goals of the firm (increase ROI) Provide the right incentive for managers to make decisions that are consistent with the goals of top management (goal congruence) Fairly determine the rewards earned by the managers for their effort and skill (ROI = sound basis for comparison between units of different size) 19-6 Alternative Measures for Evaluating the Financial Performance of Investment Centers Return on investment (ROI) Residual income (RI) Economic value added (EVA®) Return on Investment (ROI) ROI is the most common measure of investment center short-run financial performance The higher the percentage, the better the indicated financial performance In practice, be | Strategic Performance Measurement: Investment Centers Chapter Nineteen McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 19-2 Part One Explain the use and limitations of return on investment (ROI) for evaluating investment centers Explain the use and limitations of residual income (RI) for evaluating investment centers Explain the use and limitations of economic value added (EVA®) for evaluating investment centers Learning Objectives 19-3 Learning Objectives (continued) Part Two Explain the objectives of transfer pricing, and the advantages and disadvantages of various transfer-pricing alternatives Discuss important international issues that arise in transfer pricing 19-4 Investment Centers Many firms use profit centers (Chapter 18) to evaluate managers, but firms cannot use profit alone to compare one business unit to other business units because of: Differences in size Differences in operating characteristics To evaluate the financial .
