Use the following information for the next 4 questions.
Teresa's Taco Co. had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%.
-The capital investment was
A) $1,250,000
B) $75,000
C) $170,000
D) $200,000

Question

Quizplus · Accepted Answer

The capital investment can be calculated using the formula: Residual Income = Operating Income - (Required Rate of Return * Capital Investment). First, calculate Operating Income using Investment Turnover: Sales / Investment Turnover = Capital Investment, which gives $500,000 / 2.5 = $200,000. Then, verify with Residual Income: $5,000 = Operating Income - (0.15 * $200,000), which confirms the capital investment is $200,000.

Use the Following Information for the Next 4 Questions