Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so that they can meet several client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates: If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer?
A) $121.00
B) $201.59
C) $1,460.41
D) $17,504.59

Question

Kit works for a company that creates brochures for travel agencies to distribute to their clients. The company's printer has recently broken down and will need to be replaced immediately so that they can meet several client deadlines. A manager has found a vendor that has a model available for sale and has compiled the following information and estimates:  If the company has a Required Rate of Return of 7.75%, then what is the amount of Residual Income that they should anticipate after installing the new printer?
A) $121.00 
B) $201.59 
C) $1,460.41 
D) $17,504.59

Quizplus · Accepted Answer

This question requires familiarity with the formula for Residual Income: Operating Income - (Required Rate of Return × Investment). Operating Income is not given, so solve for it using the following formula: Sales - Operating Expenses = $18,965 - $17,303 = $1,662. Now, solve for Residual Income. Residual Income = $1,662.00 - (0.0775 × $18,844). Residual Income = $1,662.00 - $1,460.41. Residual Income = $201.59 (Choice B).

Kit Works for a Company That Creates Brochures for Travel