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