This video discusses the difference between ROI and Residual Income.
Both ROI and Residual Income are metrics frequently used to evaluate a division's profitability. However, ROI is expressed as a percentage whereas Residual Income is expressed as a unit of currency (e.g., dollars). This makes ROI more attractive because it is easier for managers to understand a percentage.
However, ROI has a significant disadvantage relative to Residual Income. ROI may lead to suboptimal decisions if a divisional manager rejects a project that would increase the value of the overall firm but would decrease the division's ROI. For example, if the division's ROI is currently 32%, the divisional manager might reject a project that has an ROI of 27% because it would reduce the ROI of the division (even though it might benefit the company as a whole). The use of Residual Income does not lead to this problem; when divisional managers are evaluated based on Residual Income, they have an incentive to accept any projects that earn a return higher than the amount the division is being charged for its capital.
β
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspiraβs mission is to make a high-quality business education accessible to all people.
β
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
β’ A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
β’ A 44-PAGE GUIDE TO U.S. TAXATION
β’ A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
β’ MANY MORE FREE PDF GUIDES
*
eepurl.com/dIaa5z β
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
*
edspira.thinkific.com/ β
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts:
podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify:
open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website:
www.edspira.com/podcast-2/ β
GET TAX TIPS ON TIKTOK
*
www.tiktok.com/@prof_mclaughlin β
ACCESS INDEX OF VIDEOS
*
www.edspira.com/index β
CONNECT WITH EDSPIRA
* Facebook:
www.facebook.com/Edspira * Instagram:
www.instagram.com/edspiradotcom * LinkedIn:
www.linkedin.com/company/edspira β
CONNECT WITH MICHAEL
* Twitter:
www.twitter.com/Prof_McLaughlin * LinkedIn:
www.linkedin.com/in/prof-michael-mclaughlin β
ABOUT EDSPIRA AND ITS CREATOR
*
www.edspira.com/about/
@olaadeyemoabraham548
4 years ago
Thank you for this concise and straight to the point video
2 |