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Return On Investment vs Residual Income

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Return On Investment vs Residual Income

  • This topic has 5 replies, 3 voices, and was last updated 11 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 28, 2013 at 7:29 am #127410
    diannel2012
    Member
    • Topics: 18
    • Replies: 37
    • β˜†β˜†

    hi Sir , i need help please

    1. Please explain to me what represents a Healthy residual income
    is anything Positive and not representing a loss the answer?

    2. Explain in easy term the pros, merits and cons of ROI and RI
    ive been reading the book answer and nothing quite makes sense πŸ™

    May 28, 2013 at 8:29 am #127419
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • β˜†β˜†β˜†β˜†β˜†

    If using residual income, then performance is good if the residual income improves from last year – less negative or more positive. (If measuring RI on just one project, then for that project it needs to be positive.)

    The advantage of residual income is that it achieves gola congruence – the divisional manager makes decisions that are good for the company.
    There are several disadvantages – the main one being that it cannot be used to compare divisions of different sizes, For this, measuring performance on ROI would be more sensible.

    May 28, 2013 at 8:47 am #127426
    diannel2012
    Member
    • Topics: 18
    • Replies: 37
    • β˜†β˜†

    thank u very much sir

    May 28, 2013 at 3:22 pm #127507
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • β˜†β˜†β˜†β˜†β˜†

    You are welcome πŸ™‚

    May 29, 2014 at 7:43 pm #171741
    jackson9
    Member
    • Topics: 12
    • Replies: 20
    • β˜†

    ROI is said to have a disadvantage that it discourages investment in assets……right?
    isnt this true for residual income as well?

    thank u πŸ™‚

    May 30, 2014 at 9:45 am #171848
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • β˜†β˜†β˜†β˜†β˜†

    ROI can discourage investment in assets that are ‘good’ for the company as a whole. (Only if the return on the investment is higher than that required by the company as a whole, but is lower than the divisions current return on investment).

    The main reason for having RI as an alternative is that this problem is avoided – if the investment is giving a return that is higher than that required by the company as a whole, then the RI will automatically be positive.

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