Alexandra Corp. uses an imputed interest rate of 14% in the calculation of residual income. The modeling division, which is part of Alexandra, had invested capital of $1,300,000 and an ROI of 16%. On the basis of this information, the modeling division's residual income was:

Question

Quizplus · Accepted Answer

Residual income is calculated as the net operating income minus the product of the invested capital and the imputed interest rate. Here, the net operating income is $1,300,000 * 16% = $208,000. The imputed interest is $1,300,000 * 14% = $182,000. Therefore, the residual income is $208,000 - $182,000 = $26,000.