Residual Income Compared to ROI

Residual Income Compared to ROI - Illustration 21A-4...

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RESIDUAL INCOME COMPARED TO ROI To evaluate performance using the minimum rate of return, companies use the residual income  approach.  Residual income  is the income that remains after subtracting from the controllable margin  the minimum rate of return on a company's average operating assets. The residual income for Tracker  would be computed as follows.  Illustration 21A-3    Residual income formula As shown, the residual income related to the Tracker investment is $60,000. Illustration  21A-4   indicates how residual income changes as the additional investment is made. 
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Unformatted text preview: Illustration 21A-4 Residual income comparison This example illustrates how performance evaluation based on ROI can be misleading and can even cause managers to reject projects that would actually increase income for the company. As a result, many companies such as Coca-Cola , Briggs and Stratton , Eli Lilly , and Siemens AG use residual income (or a variant often referred to as economic value added) to evaluate investment alternatives and measure company performance....
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This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 202 taught by Professor - during the Fall '11 term at Montgomery.

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Residual Income Compared to ROI - Illustration 21A-4...

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