The following data pertains to the Retail Division of Motor Express: $\begin{array}{lr}
\text { Sales } & \$ 700,000 \
\text { Invested capital } & 200,000 \
\text { Net operating profit after taxes } & 49,000 \
\text { Noninterest-bearing current liabilities } 20,000
\end{array}$ The minimum rate of return specified by Motor Express is 12 percent and the cost of capital is 8 percent.How much is residual income?
A)$33,000
B)$25,000
C)$27,400
D)$34,600

Question

Quizplus · Accepted Answer

Residual income is calculated as Net Operating Profit After Taxes (NOPAT) minus the product of the cost of capital and the invested capital. Here, NOPAT is $49,000, the cost of capital is 8%, and the invested capital is $200,000. Thus, residual income = $49,000 - (0.08 * $200,000) = $49,000 - $16,000 = $33,000.

The Following Data Pertains to the Retail Division of Motor