Why do some companies prefer the use of economic profit over return on investment in decision-making?
A) The calculations for economic profit are easier.
B) The data needed to calculate return on investment are not always available.
C) Return on investment can motivate managers to make investment decisions that are not in the best interests of the company as a whole.
D) The concept behind economic profit is more logical.

Question

Quizplus · Accepted Answer

Return on investment can incentivize managers to prioritize short-term gains over long-term growth or sustainability, as it only measures the amount of return relative to the amount invested. Economic profit, on the other hand, takes into account the opportunity cost of using resources in one way rather than another and can provide a more comprehensive measure of a company's profitability and value creation.

Why Do Some Companies Prefer the Use of Economic Profit