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

question 69

Multiple Choice

Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI) 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) returns do not increase as assets are depreciateD.
• Problems in measuring the asset base,gross versus net book values,and cost of capital are present in both residual income and ROI.Residual income avoids the suboptimization problem with high return divisions.

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