Impact of ROE on Selection and Opportunities PPT

This PPT slide, part of the 106-slide Corporate Performance Measurement PowerPoint presentation, presents a critical analysis of corporate performance measurement, particularly focusing on the implications of Return on Equity (ROE) for project selection by managers. It highlights a common scenario where managers, driven by the objective of maximizing ROE, may overlook potentially profitable projects. The graph illustrates the relationship between Net Present Value (NPV) and ROE, indicating that projects with an ROE greater than a certain threshold (R0), but less than the manager's current ROE (R) are likely to be dismissed.

The text emphasizes that managers are evaluated primarily on their ability to maximize ROE, which can lead to a narrow focus that excludes viable projects. Specifically, a manager with an ROE of R will not consider any projects that yield an ROE below R1, even if those projects could generate positive NPV. This behavior results in missed opportunities for the organization, as it restricts the range of projects that are deemed acceptable.

The slide also notes that while projects with ROE above R0 may still provide positive NPV, they will not be pursued if they fall below the manager's personal ROE threshold. This creates a gap between potential economic profit and actual project selection, ultimately limiting overall corporate performance.

Understanding this dynamic is essential for organizations aiming to optimize their project portfolios. It suggests the need for a broader evaluation framework that encourages managers to consider a wider array of projects, even those that may not meet their immediate ROE expectations, but could still contribute positively to the company's financial health.

This slide is part of the Corporate Performance Measurement PowerPoint presentation.

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