Answer (B) is correct. Residual income is a significant refinement of the return on investment concept because it forces business unit managers to consider the opportunity cost of capital. The rate used is usually the weighted-average cost of capital. Residual income may be preferable to ROI because a business unit will benefit from expansion as long as residual income is earned. Using only ROI, managers might be tempted to reject expansion that would lower ROI, even though residual income would increase. Thus, the residual income method promotes the congruence of a manager’s goals with those of the overall firm. Actions that tend to benefit the company will also tend to improve the measure of the manager’s performance.