Page 6 - PowerPoint Presentation
P. 6
PERFORMANCE MEASUREMENT
Residual income (RI)
Formula:
Long term loans are
normally arranged by
RI = Controllable profit before interest and tax - head office and therefore
not under the managers
(Controllable investment x required rate of return) control.
Where controllable investment = non current assets + net working
capital.
Residual income is superior to ROI:
• Projects may be rejected using ROI whereas they may increase firm
wealth
• Using RI all investments which will yield a return higher than the cost of
capital are accepted
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