Question

Given a minimum rate of return of 12% and a current ROI of 14%, residual income will be ______.

Option 1:
Negative

Option 2:
Zero

Option 3:
Positive

Option 4:
Undefined

Answer 1

Residual income is positive when the current ROI of 14% exceeds the minimum rate of return of 12%.

Step-by-step explanation:

The question is related to the concept of residual income, which in finance is the amount of net income generated in excess of the minimum rate of return. In this scenario, the company has a current ROI (Return on Investment) of 14%. The residual income will be Positive. To calculate the residual income, we subtract the minimum rate of return from the current ROI. If the result is positive, it means the investment is earning more than the minimum required return. Given that the minimum rate of return required is 12%, we can deduce that the residual income would be positive. This is because the actual return exceeds the minimum required rate of return.