Detailed Answer
Answer (D) is correct. Residual income is the excess of the return on an investment over the targeted amount. This amount may be defined as the imputed interest on invested capital. Some firms prefer to measure managerial performance in terms of the amount of residual income rather than the percentage ROI. The principle is that the firm is expected to benefit from expansion as long as residual income is earned. Using a percentage ROI approach, expansion might be rejected if it lowered ROI even though residual income would increase.