A bicycle manufacturer is in talks to investment in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the second option, what is their required rate of return? (Round to the percentage to two decimal places.)
A) 0.32%
B) 6.78%
C) 7.73%
D) 8.05%

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for the Required Rate of Return as follows: $37 = $918 - (Required Rate of Return × $11,400). $37 + (Required Rate of Return × $11,400) = $918. (Required Rate of Return × $11,400) = $881. Next, divide each side by $11,400. Required Rate of Return = 0.0773 or 7.73% (Choice C).

A Bicycle Manufacturer Is in Talks to Investment in Some