Congruence Between Capital Project Decision Model and Performance Evaluation Model

Capital investment decisions are the most critical decisions facing business organizations because these decisions have a long-range effect on the organizations. Goal conflict can arise when the discounted cash flow (DCF) model is used to evaluate and select capital-budgeting projects and the accrual accounting model is used for evaluating the performance of investment centers. To avoid dysfunctional decision making and reach goal congruence, the consistency between DCF decision model and performance evaluation model should achieve. The aim of this study is to propose an approach for achieving congruence between the DCF decision model and performance evaluation model. It also aims to present and discuss the techniques for achieving congruence between the two models in a historical context by reviewing relevant literature, as well as to demonstrate the importance of such congruence to rationalize the capital budgeting decisions. To resolve goal-congruence problem and rationalized investment decisions, this paper proposed using the balanced scorecard approach to evaluate the performance of investment centers. Accordingly, a balanced scorecard should be prepared for the organization as a whole and for each investment center. The proposed approach will help organizations to achieve goal congruence by motivating the managers to act in the best interests of the business as a whole and take the correct decision.