Residual income (RI) and return on investment (ROI) are common measures that capture related but distinct performance constructs. To highlight the relation between these measures, residual income can be expressed as a function of return on investment and investment base (i.e., project or division size as proxied by assets employed): residual income = (return on investment - hurdle rate) assets employed In the chart below, we plot this function. Line A charts the RIs for projects where assets employed = $400,000. Line B charts the Ris for projects where assets employed = $200,000. A division manager must decide whether to invest in a given project. The manager faces hurdle rate = 0.1 (as indicated by the vertical dotted line). The manager is paid an annual bonus based on current year ROI. As of when the manager must decide whether to invest, the manager's current year ROI is 0.15 (as indicated by the vertical dashed line). Hurdle rate ROI for CY 50 B Breakeven point 02 ROI Please select the statement that best describes the behavioural effects of using return on investment in managers' compensation schemes: The segments of Lines A and B that lie to the left of point c represent projects with positive residual incomes that the manager will choose not to invest. The underinvestment problem only arises for projects represented by Line B. Line A represents larger projects each of which the manager will choose to invest in. The area of the triangle acd is greater than the area of the triangle bcd. This reflects the fact that the underinvestment problem grows more costly as the project under consideration for investment increases in size The segment of Line A bound by the points a and c represents the set of 'larger' projects with positive residual income that the manager will choose to invest in. The segment of Line B bound by the points b and c represents the set of 'smaller" projects with positive residual incomes that the manager will choose to invest in