Question

A company's current net operating income is $16,800 and its average operating assets are $80,000. The company's required rate of return is 18%. A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000. What is the residual income of the new project? A. 20.8%

B. 20%
C. ($150)
D. $300

Answer 1

The residual income of the new project is calculated by subtracting the required rate of return multiplied by the investment from the net operating income. The calculation leads to a residual income of $300 for the new project.

Step-by-step explanation:

The student is asking about calculating the residual income of a new project. To find the residual income, we subtract the product of the required rate of return (which is 18% for this company) and the investment amount from the project's net operating income. In this case, it's $3,000 net operating income minus the product of 18% and $15,000 investment:

$3,000 - (0.18 × $15,000) = $3,000 - $2,700 = $300.

Therefore, the residual income of the new project is $300, which corresponds to option D.