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Why capital investment decision should be judged on the basis of net present value to avoid short termism n manipulation?
How can manager manipulate ROCE?
Net present value includes all the future returns, not simply the current year. (However net present value should not really be mentioned in F5 because it is not examinable until F9).
A manager can ‘cheat’ by (for example) delaying costs until next year, or bringing in this year some of next years income. This would increase this years profit, and therefore increase the ROCE. (Next year it would have the opposite effect, but if the manager is thinking short-term then they are not really worried about next year).
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