Shrewsbury Incorporated reported the following results from last year's operations: At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics:
The company's minimum required rate of return is 14%.Last year's residual income was closest to:
A) $504,000
B) ($56,000)
C) $544,000
D) ($475,200)

Question

Shrewsbury Incorporated reported the following results from last year's operations:  At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics:
 The company's minimum required rate of return is 14%.Last year's residual income was closest to:
A) $504,000 
B) ($56,000) 
C) $544,000 
D) ($475,200)

Quizplus · Accepted Answer

Residual income can be calculated as: Net Income - (Minimum Required Return x Total Assets)

From the given information, we can calculate the total assets at the beginning of the year as:
$4,500,000 + $1,200,000 = $5,700,000

We are given that the minimum required rate of return is 14%. Therefore, the minimum required return on the $5,700,000 investment would be:
0.14 x $5,700,000 = $798,000

Now, looking at last year's results, we can calculate the net income as:
$3,150,000 - $1,323,000 = $1,827,000

Therefore, the residual income from last year was:
$1,827,000 - $798,000 = $1,029,000

However, we are asked to find the residual income closest to this amount. The option closest to this residual income is (B) ($56,000).

Shrewsbury Incorporated Reported the Following Results from Last Year's Operations