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# Calculating Residual Income and Return on investment

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Vaughn Corporation had net operating income of \$380,000 and average operating assets of \$2,000,000. The corporation requires a return on investment of 18%. Show all calculations supporting your responses!

Required :

a.Calculate the company's return on investment (ROI) and residual income (RI).

b.Vaughn Corporation is considering an investment of \$70,000 in a project that will generate annual net operating income of \$12,950. Would it be in the best interests of the company to make this investment?

c.Vaughn Corporation is considering an investment of \$70,000 in a project that will generate annual net operating income of \$12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?

d.Vaughn Corporation is considering an investment of \$70,000 in a project that will generate annual net operating income of \$12,950. If the division planning to make the investment currently has a residual income of \$50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?

#### Solution Preview

Solution is attached as word document also.

Solution:

a.Calculate the company's return on investment (ROI) and residual income (RI).

ROI=Net operating income/average operating assets=380000/2000000=19%
Corporation's required income=2000000*18%=\$360000
Residual income=Net income-Required income
=380000-360000
=\$20000
b.Vaughn Corporation is considering an investment of \$70,000 in a project that will generate annual net operating ...

#### Solution Summary

Solution describes the steps to calculate ROI and residual income.

\$2.19