ROI , page 12

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  • #139940

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    Saad ALAwami
    Participant

    disadvantage of using ROI for performance measurement is that when a manager is evaluated
    using current ROI, the pressure to meet the current period’s ROI target may cause short-term profits

    Dear,

    How that roi may make decisions that are good for shot term, kindly clarify?

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  • #139951

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    Kevin Hock
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    Saad,

    Let’s use an extreme example. Let’s say that a manager has two projects that they can push for implementation.

    Project 1 will benefit the company for just this fiscal year, costs $10,000, and will increase profit by $20,000, for an ROI of 200%.

    Project 2 will benefit the company for many years, costs $100,000, and will increase profits by $25,000, for an ROI of 25%.

    If the manager is evaluated solely based on ROI, he would choose Project 1 (200% ROI), even though Project 2 (25% ROI) will make more money for the company and benefit it more in the long term.

    Kevin

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