Return on investment cannot be used effectively to evaluate profit centres because it motivates managers to make suboptimal decisions from the viewpoint of the organizations' owners.

Question

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Return on investment (ROI) is a financial performance metric that measures the profitability of an investment relative to its cost. However, when used as the sole measure of performance for profit centers, it can lead managers to make decisions that prioritize short-term gains at the expense of long-term sustainability and overall organizational goals. ROI also does not consider external factors such as market changes and economic conditions, which can affect the performance of profit centers. Therefore, ROI should only be used in conjunction with other measures of performance and should not be relied upon as the sole measure of profitability.

Return on Investment Cannot Be Used Effectively to Evaluate Profit