A bicycle manufacturer is in talks to invest in some new equipment for their production department, and they are exploring different options. The first option is equipment that will cost $13,000, have Operating Income of $999, and have Residual Income of $18. The second option will cost them $11,400, have Operating Income of $918, and have Residual Income of $37. If the company selects the first option, what is their Required Rate of Return? (Round the percentage to two decimal places.)
A) 0.14%
B) 7.55%
C) 7.68%
D) 8.61%

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). This question provides some of these numbers. Solve for the Required Rate of Return as follows: $18 = $999 - (Required Rate of Return × $13,000). $18 + (Required Rate of Return × $13,000) = $999. (Required Rate of Return × $13,000) = $981. Next, divide each side by $13,000. Required Rate of Return = 0.0755 or 7.55% (Choice B).

A Bicycle Manufacturer Is in Talks to Invest in Some