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

Question

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Return on investment (ROI) can sometimes lead managers to reject profitable projects that could benefit the company as a whole, while residual income encourages decisions that align more closely with overall company interests by considering the cost of capital.

Return on Investment Is Superior to Residual Income as a Means