When using residual income (RI) as a project-screening tool, management should accept a project if
A) RI is negative.
B) RI is positive.
C) RI equals return on investment.
D) None of these.

Question

Quizplus · Accepted Answer

Residual income is the income that remains after deducting the cost of capital from the income generated by an investment. Management should accept a project if the RI is positive. If RI is negative, it means that the project is not generating enough income to cover the cost of capital, and accepting the project would result in a net loss. Similarly, if RI equals return on investment, it means that the project is generating just enough income to cover the cost of capital, and there is no residual income left. Therefore, the best choice is B, as a positive RI indicates that the project is generating more income than the cost of capital, and would provide additional value to the company.

When Using Residual Income (RI) as a Project-Screening Tool, Management