Taejeah

Residual income is a measure of the centre's profits after deducting a notional or imputed interest cost. It is an alternative way of measuring the performance of an investment centre instead of using ROI.

The centre's profit is after deducting depreciation on capital employed.

The imputed cost of capital might be the organisation's cost of borrowing or its weighted average cost of capital.

RI can sometimes give results that avoid the behavioural problem of dysfunctionality.

Its weaknesses is that it does not facilitate comparisons between investment centres nor does it relate the size of a centre's income to the size of the investment.

Examination questions on residual income may focus on the behavioural aspects of investment centre.