9) Alternative measures of performance

Question 1

ROI (Return on investment) vs RI (Residual income) as divisional performance measures, pros and cons

Answer 1

1. ROI can result in dysfunctional behaviour when appraising new investments, as divisions will not necessarily act in the company’s best interests, but RI resolves this aspect. 2. ROI is a relative percentage, RI is based on absolute returns above the required minimum. 3. ROI does facilitate comparisons between divisions. 4. They both encourage divisional managers to manipulate both profit and capital employed figures.

Question 2

EVA (Economic Value Added), how to calculate

Question 3

Residual income (RI), calculate

Answer 3

Increase in profit, less, interest charge