Question

There can be negative managerial incentive effects when NPV (net present value) is used for long-term decision making, and ROI is used for subsequent performance evaluation. A strategy for dealing with this problem is to ______.

Option 1:
Align Incentives

Option 2:
Ignore Incentives

Option 3:
Increase NPV Weightage

Option 4:
Abandon NPV

Answer 1

Negative managerial incentive effects can occur when NPV is used for long-term decision making, and ROI is used for subsequent performance evaluation. A strategy for dealing with this problem is to 1) align incentives.

Step-by-step explanation:

Negative managerial incentive effects can occur when NPV is used for long-term decision making, and ROI is used for subsequent performance evaluation. This is because NPV takes into account the time value of money, while ROI focuses on the returns generated within a specific period. When these two metrics are misaligned, it can lead to suboptimal decisions and unintended negative consequences.

A strategy for dealing with this problem is to align incentives. By aligning the incentives of managers with the long-term goals of the organization, it reduces the likelihood of them prioritizing short-term gains over long-term value creation. This can be done through performance evaluation systems that incorporate both NPV and ROI, as well as other non-financial measures that capture long-term objectives.