Residual income is a better measure for performance evaluation of an investment center manager than return on investment because:
A)the problems associated with measuring the asset base are eliminated.
B)desirable investment decisions will not be rejected by divisions that already have a high ROI.
C)only the gross book value of assets needs to be calculated.
D)returns do not increase as assets are depreciated.

Question

Quizplus · Accepted Answer

Residual income considers the cost of capital and encourages managers to make decisions that increase overall firm value, even if it reduces their division's ROI, thus avoiding the rejection of beneficial investments.

Residual Income Is a Better Measure for Performance Evaluation of an Investment