Cody Corporation's Southern region operates as an investment center.The division's director is considering investing in machinery which costs of $100,000 and is expected to generate $32,000 in additional operating income.If the residual income for the equipment is $12,000, what is the division's required rate of return?

Question

Quizplus · Accepted Answer

The formula for residual income is operating income - (assets x required rate of return). Rearranging the formula to solve for the required rate of return, we get required rate of return = (operating income - residual income) / assets. Plugging in the given values, we get required rate of return = (32,000 - 12,000) / 100,000 = 20%. Therefore, the best choice is B) 20%.

Cody Corporation's Southern Region Operates as an Investment Center