Question

McCarthy Enterprises had average operating assets of $100,000, its return on investment is 20%, and its minimum required rate of return on investments is 16%. What is its residual income for the year?

Answer 1

The correct answer is $ 4,000

Notes:

1. return on investment = Net Profit / Total Assets *100

20 % = Net Profit / $ 100,000 * 100

Net Profit = $ 20,000

2.

Average Operating Assets	1,00,000
Net Operating Income	20,000
Minimum Required Rate of Return	16%
Residual Income  [ Net Operating Income-(Average Operating Assets * Minimum Required Rate of Return )]	4,000
Average Operating Assets * Minimum Required Rate of Return	16,000