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Sir I was watching your lecture on divisional performance but I need your help that why didn’t you calculate the company’s performance using residual income (in example 3 of chapter 17).
Example 3:
a) new investment:
RI = 17000 – (100,000 x 15%) = $2000BUT how do we compare this with targeted RI because there is no targeted RI in the question?
b) old investment:
RI = 82000 – (500,000 x 15%) = $7000new investment
RI = 99000 – (600,000 x 15%) = $9000Since the new investment returns more than the old investment so the manager should accept the new investment.
With RI we are not comparing with a target (the only target is the 15% required). All that matters is whether the RI increases or decreases.
What I understood from your response is that with ROI we assess the performance of the company and manager whether the new investment is good to undertake by them or not.
With RI we assess only the divisional manager’s performance (not the performance of the company) whether new investment is good or not.
Are both points true???
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