People's Construction Company has set a 15% required minimum rate of return.The company's CFO is considering investing in a $125,000 crane that is expected to generate $25,000 in additional operating income.What is the crane's residual income?
A)$4,500
B)$6,250
C)$15,000
D)$18,750

Question

Quizplus · Accepted Answer

Residual income = operating income - (required rate of return x assets)
Operating income = $25,000
Required rate of return = 15% of $125,000 = $18,750
Assets = $125,000
Residual income = $25,000 - ($18,750) = $6,250
Therefore, the residual income of the crane is $6,250, which is greater than zero and meets the company's required minimum rate of return. So, investing in the crane would be the best choice.

People's Construction Company Has Set a 15% Required Minimum Rate