Which of the following statements contrasting residual income with return on investment is correct?
A)ROI may lead to goal incongruence while residual income does not.
B)ROI is a lagging indicator while residual income is a leading indicator.
C)Residual income is a financial measure while return on investment emphasizes the customer perspective.
D)Residual income is a long-term measure while ROI is a short-term measure.

Question

Quizplus · Accepted Answer

Residual income is a measure that focuses on the amount of income generated by an investment after accounting for the cost of capital required to finance the investment. It encourages managers to undertake projects that will generate income in excess of their required return. This discourages goal incongruence since managers are incentivized to generate excess income. On the other hand, ROI is a ratio that measures the amount of return generated by an investment relative to its cost. It can lead to goal incongruence since managers may choose projects that generate a higher ROI but not necessarily higher residual income.

Which of the Following Statements Contrasting Residual Income with Return