Residual income (RI) may be a better measure for performance evaluation of an investment center than return on investment (ROI) because:
A) Problems associated with measuring the asset base are eliminated.
B) Desirable investment decisions will not be discouraged by high-rate-of-return divisions.
C) Only the gross book value (GBV) of assets needs to be calculated.
D) Returns do not increase as assets are depreciated.
E) The arguments over the appropriate discount rate to use in the calculations are eliminated.

Question

Quizplus · Accepted Answer

Residual income encourages managers to make investments that earn more than the minimum required rate of return, thus not discouraging potentially profitable investments due to already high rates of return in their divisions, unlike ROI which might lead to rejecting profitable projects to maintain high ROI percentages.

Residual Income (RI) May Be a Better Measure for Performance