I have a question,
Is residual income directly related to the NPV and does it make sure that managers will select project with positive NPV?
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Performance Management
6y ago#1No - it I s not directly related to the NPV.
NPV is based on future expected cash flows, whereas the RI is calculated on profits and when making a decision managers are estimating the short-term effect.
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hi sir
but RI uses the cost of capital, so it is more directly related to NPV than ROI isn't it?
5y ago#3RI does not automatically use the cost of capital. The notional interest rate is whatever rate the company wants to achieve from the division. They might choose it to be their cost of capital but it does not have to be.
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