Question

If operating income is $20,000, operating assets are $100,000, and the desired ROI is 15%, what is the residual income?

A) $10,000
B) $15,000
C) $5,000
D) $2,500

Answer 1

Residual income is calculated by subtracting the product of the desired return on investment (ROI) and operating assets from the operating income. With an operating income of $20,000, operating assets of $100,000, and a desired ROI of 15%, the residual income comes out to be $5,000, which is option C).

Step-by-step explanation:

The concept being discussed here is residual income, which is a measure of the profitability of a company after accounting for the cost of capital. The formula to calculate residual income is:

Residual Income = Operating Income - (Desired ROI * Operating Assets)

Given the data: Operating Income = $20,000, Operating Assets = $100,000, and Desired ROI = 15%, we calculate the residual income as follows:

Residual Income = $20,000 - (0.15 * $100,000)

Residual Income = $20,000 - $15,000

Residual Income = $5,000

Therefore, the correct answer is C) $5,000.