Question

In what way can the use of ROI as a performance measure for investment centers lead to bad decisions? How does the residual income approach overcome this problem

Answer 1

Answer:

The correct answer is:

If ROI is used to measure performance, an investment center manager can reject a profitable investment opportunity whose rate of return is higher than the company's required rate of return but is less than the current ROI of the company, business.

The residual income approach overcomes this because any situation like this, will result in residual income.

Explanation:

ROI (Return On Investment) is the economic value generated as a result of the performance of different marketing activities. With this data, we can measure the return we have obtained from an investment.

One of the most important things to keep in mind when we carry out an Inbound Marketing strategy is to check your results and measure your profitability.

ROI is very useful to evaluate this profitability. It becomes the relationship between marketing investment and the benefits generated, whether direct sales or obtaining potential customers.

Calculating the ROI is essential to make the decision of future investments. We will have the information we need to evaluate which projects are more profitable. In addition, they mark the path we have to follow in the future.

Investment risk decision making requires knowing the probability distribution of the cash flows of each project. However, this is not enough when it comes to choosing between different alternative projects. Thus, the final decision may be different for each individual investor depending on the profitability-risk combination that is considered most appropriate. This implies the need to complete the above information by considering the investor's attitude towards risk.