Abstract This article examines the use of rate of return on investment in the evaluation of two aspects of divisional performance--the economic evaluation of the division as an investment and the managerial evaluation of the division executives. It is argued that these two uses are different and therefore have different implications with respect to their information set and standards for comparison. The use of return on investment to measure the periodic profitability of the resources invested in a division is called "retrospective economic evaluation." The term "retrospective" distinguishes the analysis from a true economic evaluation using the present value of future cash flows. The term "economic evaluation" denotes that the concern is with the size of the income stream produced by the divisional activities in relation to the amount of resources invested in the division. Retrospective economic evaluation directs top management's attention to divisions, or activities within divisions, that persistently earn less than the target rate of return on investment, and shows how viable the division's activities are likely to be on a continuing basis.
Earl A. Spiller Jr. (Wed,) studied this question.