Questions:
(a) Explain, with appropriate calculations, why neither return on investment nor residual income would motivate Elton to invest in the process showing the higher net present value. To what extent can the use of alternative accounting techniques assist in reconciling the conflict between using accounting-based performance measures and discounted cash flow investment appraisal techniques?
(b) Managers tend to use post-tax cash flows to evaluate investment opportunities, but to evaluate divisional and managerial performance on the basis of pre-tax profits. Explain why this is so and discuss the potential problems that can arise, including suggestions as to how such problems can be overcome.
(c) Discuss what steps can be taken to avoid dysfunctional behaviour which is motivated by accounting-based performance targets.