Performance Management

This topic has 3 replies, 3 voices, and was last updated 5 years ago by John Moffat.

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June 6, 2020 at 9:31 pm #573007
ketki15
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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?
June 7, 2020 at 10:19 am #573030
John Moffat
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No – 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.
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
August 1, 2020 at 6:50 am #578882
jeeyun
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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?
August 1, 2020 at 10:14 am #578904
John Moffat
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RI 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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