Question

Relative to ROI, RI has certain advantages, including ______.

Option 1:
Accounting for the cost of capital.

Option 2:
Encouraging long-term decision-making.

Option 3:
Focusing on short-term profitability.

Option 4:
Ignoring the time value of money.

Answer 1

RI has advantages over ROI, such as accounting for the cost of capital, which encourages long-term decision-making and aligns with the firm's goals.

Step-by-step explanation:

Relative to Return on Investment (ROI), Residual Income (RI) has certain advantages, including accounting for the cost of capital. RI measures the excess income after accounting for the cost of capital, encouraging managers to make decisions that may reduce short-term earnings but increase the long-term health and profitability of the company. This approach contrasts with ROI, which may not fully capture the financial benefit of these long-term investments. RI is often preferred as it aligns managers' decision-making with the long-term goals of the firm, as it takes into consideration the time value of money.