Residual income (RI) is calculated as the amount of return (net income before taxes) that is in excess of a targeted amount of return on the investments that are employed by that division. RI is focused on the dollar amount of income that is in excess of a targeted amount. It is not focused on a percentage of return as ROI is. When using RI to evaluate investment opportunities, any project that has a positive RI will be accepted even if it will reduce the overall company or division ROI. Thus, desirable investment decisions will not be neglected by high return divisions.
The asset base or amount of invested capital are calculated in the same manner for both methods.
As assets are depreciated, both methods will be affected in the same manner.
The asset base or amount of invested capital are calculated in the same manner for both methods, so residual income does not eliminate this problem.
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