Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)
A) the problems associated with measuring the asset base are eliminated.
B) desirable investment decisions are less likely to be neglected by high-return divisions.
C) only the gross book value of assets needs to be calculated.
D) the arguments about the implicit cost of interest are eliminated.

Question

Quizplus · Accepted Answer

Residual income encourages managers to make decisions that are beneficial for the company as a whole, even if they don't maximize the division's return on investment, thus reducing the likelihood of neglecting desirable investments.

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