Worley Inc. reported the following results from last year's operations:
At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics:
The company's minimum required rate of return is 17%.
Required:
1. What was last year's residual income?
2. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall residual income this year?
3. If Westerville's CEO earns a bonus only if residual income for this year exceeds residual income for last year, would the CEO pursue the investment opportunity?

Question

Worley Inc. reported the following results from last year's operations:
  At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics:
  The company's minimum required rate of return is 17%.
Required:
1. What was last year's residual income?
2. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall residual income this year?
3. If Westerville's CEO earns a bonus only if residual income for this year exceeds residual income for last year, would the CEO pursue the investment opportunity?

Quizplus · Accepted Answer

The Answer of Worley Inc. reported the following results from last year's operations:
  At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics:
  The company's minimum required rate of return is 17%.
Required:
1. What was last year's residual income?
2. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall residual income this year?
3. If Westerville's CEO earns a bonus only if residual income for this year exceeds residual income for last year, would the CEO pursue the investment opportunity?