Question

For the period just ended, Trek Corporation's Trailer Division reported profit of $171 million and invested capital of $610 million. Assuming an imputed interest rate of 20%, which of the following choices correctly denotes Trailer’s return on investment (ROI) and residual income? ROI Residual Income A. 28% $49 million B. 28% $(49 million) C. 20% $49 million D. $49 million 28% E. None of the answers is correct.

Answer 1

Option (A) is correct.

Step-by-step explanation:

Return on investment = (operating profit ÷ Invested capital) × 100

= ($171 million ÷ $610 million) × 100

= 0.28 × 100

= 28%

Residual income:

= operating profit - (Invested capital × Imputed interest rate)

= $171 - ($610 ×20%)

= $171 - $122

= $49 million

Therefore, Trailer’s return on investment (ROI) and residual income is 28% and $49 million, respectively.