Brookings Company evaluates its managers on the basis of return on investment. D

Question

Brookings Company evaluates its managers on the basis of return on investment. Division Three has a return on investment (ROI) of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the manager of Division Three to accept a project earning a 12% return?

Multiple Choice

Both ROI and residual income will motivate the manager to accept the project.

ROI

Residual income

Neither ROI nor residual income will motivate the manager to accept the project.

Explanation / Answer

Residual income

Net income that an investment can earn over the required rate of return is known as Residual income which is a better performance indicator compared to ROI

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