Durango Corporation's Midwestern region operates as an investment center.Rich Ruhlman, the division's manager, has set a 15% required minimum rate of return.Ruhlman is considering investing in computerized manufacturing equipment with a cost of $220,000.The equipment is expected to generate $65,000 in additional operating income.What is the equipment's residual income?
A)$65,000
B)$33,000
C)$32,000
D)None of these answer choices are correct

Question

Quizplus · Accepted Answer

The residual income can be calculated as
Residual Income = Operating Income - Minimum Rate of Return * Investment
Operating Income = $65,000
Minimum Rate of Return = 15% of $220,000 = $33,000
Investment = $220,000
Residual Income = $65,000 - $33,000 = $32,000

Durango Corporation's Midwestern Region Operates as an Investment Center