Final answer:
Residual income is a better measure for performance evaluation of an investment than return on investment because desirable investment decisions will not be rejected by divisions that already have a positive residual income.
Step-by-step explanation:
Residual income is a better measure for performance evaluation of an investment than return on investment because desirable investment decisions will not be rejected by divisions that already have a positive residual income. Return on investment (ROI) is a measure that calculates the profitability of an investment by comparing its gains to its costs, while residual income (RI) measures the income earned after deducting the cost of capital from the net operating profit. In performance evaluation, residual income recognizes the value creation beyond the minimum return on investment, leading to more accurate assessments of investment decisions.