Question

Measurement issues associated with the use of return on investment (ROI) for evaluating the relative performance of investment centers within an organization include ______.

Option 1:
Timing differences in cash flows

Option 2:
Consistency in accounting methods

Option 3:
Accuracy in budget forecasts

Option 4:
Alignment with industry benchmarks

Answer 1

Measurement issues associated with ROI for evaluating investment performance include timing differences in cash flows, consistency in accounting methods, accuracy in budget forecasts, and alignment with industry benchmarks.

Step-by-step explanation:

Measurement issues associated with the use of return on investment (ROI) for evaluating the relative performance of investment centers within an organization include:

1. Timing differences in cash flows: ROI calculations may not consider the timing of cash flows, which can lead to inaccurate assessments of investment performance. For example, if one investment has a longer payback period but a higher ROI, it may be favored over a shorter payback period investment with a lower ROI.
2. Consistency in accounting methods: To accurately compare investment centers, consistent accounting methods should be used. Different accounting practices can result in different ROI calculations.
3. Accuracy in budget forecasts: If budget forecasts are inaccurate, it can affect the ROI calculation and the evaluation of investment performance.
4. Alignment with industry benchmarks: Evaluating ROI without considering industry benchmarks may lead to inappropriate comparisons.