For what purpose do companies calculate residual income?

Question

Quizplus · Accepted Answer

Companies calculate residual income to evaluate management performance. Residual income is the income earned by a division or project after deducting the cost of capital. It helps to determine whether the return on investment is meeting the minimum required rate of return. By evaluating residual income, companies can identify the best performing managers and departments, and make decisions to allocate resources to achieve higher returns.

For What Purpose Do Companies Calculate Residual Income