Answer (B) is correct . Residual income is the excess of the amount of return on investment (ROI) over a targeted amount equal to an imputed interest charge on invested capital. The rate used to impute the interest is usually the weighted-average cost of capital. The advantage of using residual income rather than percentage ROI is that the former emphasizes maximizing an amount instead of a percentage. Managers are encouraged to accept projects with returns exceeding the cost of capital even if the investments reduce the percentage ROI.
Answer (A) is incorrect because This ROI computation does not subtract imputed interest on capital used from the investment base.
Answer (C) is incorrect because Operating income equals operating revenues minus operating costs.
Answer (D) is incorrect because This ROI computation does not subtract imputed interest on capital used from the investment base.
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