Some managers believe that residual income is superior to return on investment as a means of measuring performance,as it encourages the manager to make investment decisions that are more consistent with the interests of the company as a whole.

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Residual income takes into account the cost of capital and compares it to the actual income generated by an investment. This incentivizes managers to make decisions that maximize profits for the company as a whole, rather than just focusing on the return on investment.

Some Managers Believe That Residual Income Is Superior to Return