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ACCA Strategic Professional · Advanced Performance Management · Performance and reward

Brenmore Group's divisions are evaluated on return on investment (ROI) with a bonus paid above 15%. Division A earns 20% ROI on its existing assets and could accept a project returning 17%, which exceeds the group cost of capital of 12%. The manager rejects the project. Which statement best explains the problem and an appropriate system change?

The manager rejects the project because accepting a 17% return would dilute divisional ROI of 20%, even though it beats the 12% cost of capital. Residual income, charging capital at the cost of capital, would align the manager's incentives with group value creation.

  1. AGoal congruence fails because the project would dilute divisional ROI; residual income using the cost of capital would encourage acceptanceCorrect
  2. BThe manager is correctly rejecting an unprofitable project; no change is needed
  3. CGoal congruence fails because ROI ignores profit; switching to revenue growth targets would solve it
  4. DThe problem arises from using the cost of capital; the bonus threshold should be raised to 20%

Explanation

The 17% project lowers divisional ROI from 20% but earns more than the 12% cost of capital, so it adds shareholder value. Residual income charges capital at 12% and rewards any project above that, restoring goal congruence. Raising the threshold would make rejection more likely.

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