Which of the following is an advantage of the residual income performance measure?
A) It minimises the suboptimal decision making that can stem from the use of ROI.
B) The cost of capital is easy to determine.
C) The required rate of return is easy to determine.
D) It encourages short-term decision making.

Question

Quizplus · Accepted Answer

Residual income is a better measure compared to ROI as it takes into account the cost of capital and considers long-term profitability instead of just the return on investment. This helps in avoiding suboptimal decision making that may result from using ROI as a performance measure. The cost of capital and required rate of return are determined separately and not necessarily easy to determine. Residual income also encourages long-term decision making instead of focusing on short-term results.

Which of the Following Is an Advantage of the Residual