Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI)because (CMA adapted)
A)the problems associated with measuring the asset base are eliminated.
B)desirable investment decisions will not be neglected by high return divisions.
C)only the gross book value of assets needs to be calculated.
D)returns do not increase as assets are depreciated.
E)the arguments over the cost of capital are eliminated.

Question

Quizplus · Accepted Answer

Residual income considers the cost of capital and encourages managers to make decisions that increase overall firm value, avoiding the neglect of beneficial investments that might have lower ROI but positive residual income.

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