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

question 136

Multiple Choice

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 will not 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.
• Problems in measuring the asset base,gross versus net book values,and implicit cost of interest are present in both residual income and ROI.Residual income avoids the suboptimization problem with high return divisions.

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