Question

Assume you are the Chief Operating Officer (COO) for a publicly-traded company that has three separate divisions. Each division produces and markets a separate line of products. The products do not compete with each other, and each division operates in a relatively autonomous environment. Accordingly, each division is deemed to be an investment center. The company’s CEO has charged you with designing a uniform evaluation system that will be used to evaluate each of the division managers. Prepare an executive summary that describes and defends the plan you propose. If you use multiple criteria, you should indicate the weight to be given each one, and why you believe each one is an appropriate measure.

Answer 1

As a COO of company I will measure performance of each investment division and their managers on basis of following criteria.

1. Net present value(NPV)- it is difference between present value of cash outflows and present value of cash inflows over a period of time.

2. Internal rate of return(IRR)-it is the rate at which net present value of all cash flows equal to zero

3.profitability ratio-it measures overall profitability of company considering all cost of company.it includes return of asset ratio, gross profit ratio, net proft ratio,return on capital employed ratio.

There are various factor to measure performance of centre and manager but most weight should be given to net present value.it is more realistic then any other.