The manager of Synergy Company's Stock Division projects the following for next year:

The manager can invest in an additional project that would require $50,000 investment in additional assets and would generate $9,000 of additional income.
- The company's minimum rate of return is 15%.What is the residual income for the Stock Division with the additional project?

A) $40,000
B) $6,000
C) $13,750
D) $4,200
E) $25,600

Question

The manager of Synergy Company's Stock Division projects the following for next year:

The manager can invest in an additional project that would require $50,000 investment in additional assets and would generate $9,000 of additional income.
- The company's minimum rate of return is 15%.What is the residual income for the Stock Division with the additional project?
 
A) $40,000 
B) $6,000 
C) $13,750 
D) $4,200 
E) $25,600

Quizplus · Accepted Answer

Residual Income = Operating Income* - (Minimum Rate of Return × Operating Assets**) = ($70,000 + $9,000) - [0.15 × ($385,000 + $50,000)] = $13,750
*Operating income with additional project = ($70,000 + $9,000)
**Operating assets with additional project = ($385,000 + $50,000)

The Manager of Synergy Company's Stock Division Projects the Following