Question

Which of the following statement is TRUE regarding residual income? A. Residual income is a better performance measure than return on investment. B. Residual income motivates managers to pursue investments where the ROI associated with those investments exceeds the company’s minimum required return but is less than the ROI currently earned by the managers. C. Residual income can be used to compare the performance of divisions of different sizes. D. Some investment opportunities that should be accepted from the viewpoint of the entire company could be rejected by a manager if the manager is evaluated on the basis of residual income.

Answer 1

Residual income motivates managers to pursue investments where the ROI associated with those investments exceeds the company’s minimum required return but is less than the ROI currently earned by the managers.

Residual income is the excess of income over company's minimum required rate of return.

Pursuing investments that exceed company's minimum required rate of return would increase residual income of managers and thus would be accepted.

Residual income cannot be used to compare the performance of divisions of different sizes, so ROI is a better performance measure

Option B is correct