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Residual Income (RI) be used to overcome ROI drawbacks

ROI is a useful performance measure for divisions' profitability As it is based on comparing profit with the investment value it is possible to be affected by depreciation. When we deduct the depreciation charges, the investment value goes down thus the ROI will increase even if profits remain the same.

What other drawbacks we can identify in the use of ROI as a performance measure of divisions?
How Residual Income (RI) can be used to overcome some of ROI's drawbacks?

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How Residual Income (RI) can be used to overcome some of ROI's drawbacks?

ROI is a useful performance measure for divisions' profitability as it is based on comparing profit with the investment value it is possible to be affected by depreciation. When we deduct the depreciation charges, the investment value goes down thus the ROI will increase even if profits remain the same.

What other drawbacks we can identify in the use of ROI as a performance measure of ...

Solution Summary

The solution discusses the Residual Income (RI) and the ways it can be used to overcome some of ROI's drawbacks.

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