Question

The manager of Synergy Company's Stock Division projects the following for next year: Sales $195,000 Operating income 70,000 Operating assets 385,000 The manager can invest in an additional project that would require $50,000 investment in additional assets and would generate $9,000 of additional income. The company's minimum rate of return is 15%. What is the residual income for the Stock Division with the additional project

Answer 1

13,750

Step-by-step explanation:

Residual income can be calculated by deducting required return from the Net Operating income

DATA

Operating income = 70,000

Operating assets = 385000

Additional income = 9000

Additional investment = 50,000

Residual income =?

Solution

Residual income = Net Operating income - Required return

Residual income = (70,000+9,000) - ((385,000+50,000)x15%)

Residual income = 79,000 - 65250

Residual income = 13,750