Residual income is a better measure for performance evaluation of an investment center manager than return on investment because
A)the problems associated with measuring the asset base are eliminated.
B)desirable investment decisions will not be rejected by divisions that already have a high ROI.
C)only the gross book value of assets needs to be calculated.
D)returns do not increase as assets are depreciateD.

Question

Quizplus · Accepted Answer

Residual income encourages managers to make profitable investments that may lower the division's overall ROI but are beneficial for the company as a whole. It does this by focusing on absolute dollar amounts of income generated over a minimum required return, rather than the ROI percentage, which can discourage investment in projects that have a lower ROI than the division's current ROI, even if those projects would add value to the company.

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