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    Residual Income Long Beach Pharmaceutical Company

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    Long Beach Pharmaceutical Company has two divisions, which reported the following results for the most recent year.

    Division I Division II
    Income $900,000 $200,000
    Average invested capital $6,000,000 $1,000,000
    ROI 15% 20%

    1. Compute each division's residual income for the year under each of the following assumptions about the firm's cost of acquiring capital. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

    Division I Division II
    Residual income at 12% $ $
    Residual income at 15% $ $
    Residual income at 18% $ $
    Inputed interest rate is 14%

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    Solution Summary

    This solution illustrates how to compute a division's residual value at different costs of capital.