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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?

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    https://brainmass.com/business/accounting/244460

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    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

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