Within the context of capital budgeting, a primary goal-congruency problem exists when discounted cash flow (DCF) models are used for decision-making purposes, but accrual-based earnings figures are used for subsequent performance-evaluation purposes. Which of the following items is not likely to be useful for addressing this goal-congruency problem?
A) Monte Carlo simulation.
B) Use of EVA® as the financial-performance metric.
C) Separating incentive compensation (i.e., "reward") from budgeted performance.
D) Conducting post-audits of capital investment decisions.

Question

Within the context of capital budgeting, a primary goal-congruency problem exists when discounted cash flow (DCF) models are used for decision-making purposes, but accrual-based earnings figures are used for subsequent performance-evaluation purposes. Which of the following items is not likely to be useful for addressing this goal-congruency problem? 
A) Monte Carlo simulation.
B) Use of EVA® as the financial-performance metric.
C) Separating incentive compensation (i.e., "reward") from budgeted performance.
D) Conducting post-audits of capital investment decisions.

Quizplus · Accepted Answer

Monte Carlo simulation is a useful method for assessing the range of potential outcomes and risks associated with different capital investment decisions. However, it is not directly relevant to addressing the goal-congruency problem of using DCF models for decision-making and accrual-based earnings for performance evaluation. The other options (B, C, and D) are all potential solutions for this problem: using EVA as a financial-performance metric can align incentives with long-term value creation; separating incentive compensation from budgeted performance can ensure that managers are not rewarded for meeting short-term goals at the expense of long-term value; and conducting post-audits of capital investment decisions can help identify areas for improvement and ensure that investments are evaluated based on their actual, rather than anticipated, performance.

Within the Context of Capital Budgeting, a Primary Goal-Congruency Problem