Detailed Answer
Answer (B) is correct. Residual income is the excess of the amount of return on investment (ROI) over a targeted amount equal to an imputed interest charge on invested capital. The rate used to impute the interest is usually the weighted-average cost of capital. The advantage of using residual instead of a percentage. Managers are encouraged to accept projects with returns exceeding the cost of capital even if the investments reduce the percentage ROI.
