Return on Investment

If the company accepts the new investment because ROI is higher than the target ROI then it will result in increase in profitability of the company. It is in the interest of the company to undertake the new investment.

We only account for additional profit and additional investment when comparing the two ROIs from the company’s point of view.

We compare the new investment with the targeted ROI to see whether the new investment is giving more return or more ROI

If the manager accepts the new investment because ROI with new investment is higher than the ROI without new investment then it will result in increase in profitability of the division. It is in the interest of the division to undertake the new investment.

The manager is rewarded if he is able to increase the current ROI by taking new investment.

[We compare the two different investments made by the managers of the division to see which one is giving more benefit or more ROI)

Goal Congruence is where the company and division both are having increase in profitability by accepting the new investment due to the goal congruent decisions made by the manager. However, if either the company accepts the new investment but the manager does not or the manager accepts the new investment but the company does not, it is regarded as not goal congruent decision.

Is that all true?