The manager of the West Division of Beach Clothing Company is evaluating the acquisition of a new embroidery machine.The budgeted operating income of the West Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing current liabilities of $1,000,000.The proposed investment would add $750,000 to operating income and would require an additional investment of $3,500,000.The targeted rate of return for the West Division is 14 percent and the cost of capital is 9 percent.Ignoring taxes, how much is the residual income of the West division if the embroidery machine is purchased?
A)$2,545,000
B)$1,320,000
C)$2,860,000
D)$4,456,000

Question

Quizplus · Accepted Answer

Residual income = (Operating income - (Cost of capital * Total assets))= ($4,000,000 + $750,000 - (0.09 * $22,000,000))= $2,545,000

The Manager of the West Division of Beach Clothing Company