Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

Question

Business

Kaliyah

24 September, 21:40

Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

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Answers (1)

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Jillian · Answer 1

Residual income = $666,270

Explanation:

The residual income is the amount left after the opportunity cost of capital deducted from the net operating income

Operating income=Contribution margin - Fixed cost

Operating income = 1,050,000 - 325,500 = $724,500

Residual income = Net income - (cost of capital * capital invested)

=$724,500 - (18% * 323,500) = 666270

Residual income = $666,270