Abstract
The main rationale advanced for the use of residual income in divisional performance measurement is its consistency with the net present value (NPV) criterion for decision-making. The present value of residual incomes ex ante over a project's entire lifetime can be shown to equal NPV, but periodic consistency is elusive and depends on the calculation of the asset base. A number of past proposals to overcome this problem, none of which ensure full periodic consistency, are examined. Two further methods are considered, one of which ensures that residual incomes ex ante give the same ranking as NPV for projects of equal life. However, at best such as measure satisfies only one of the three purposes commonly associated with residual income. The conclusions point to the need to specify the purposes of financial performance measures more clearly and to use individual measures which are focused on particular assessment needs.
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