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

question 30

Multiple Choice

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.

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Definitions:

Compensating Balance

Compensating Balance is a minimum bank account balance that a borrower must maintain as part of a loan agreement, often used by banks as a requirement for extending a loan.

Interest Rate

The percentage of principal charged by the lender for the use of its money or the return earned on deposited funds.

Effective Interest Rate

The actual return on an investment, taking into account the effect of compounding interest.

Cash Cycle

The process that manages the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales.