Thurston, Inc. experienced a 14% rate of return on average investment of $1,000,000. If the required rate of return is 12%, then residual income is:
A)$20,000
B)$40,000
C)$120,000
D)$140,000

Question

Quizplus · Accepted Answer

Residual income is calculated as the actual return minus the required return. Here, the actual return is 14% of $1,000,000, which is $140,000. The required return is 12% of $1,000,000, which is $120,000. Therefore, the residual income is $140,000 - $120,000 = $20,000.