Answer (C) is correct . Residual income is the excess of the return on an investment over a targeted amount equal to an imputed interest charge on invested capital. The rate used is ordinarily set as a target return by management but is often equal to the weighted average cost of capital. Some enterprises prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI because the firm will benefit from expansion as long as residual income is earned.
Answer (A) is incorrect because The cost of equity capital must also be incorporated into the imputed interest rate.
Answer (B) is incorrect because The current weighted-average cost of capital must be used.
Answer (D) is incorrect because The rate should be based on cost of capital, not investment returns of preceding years.
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