Teresa's Taco Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was
A) $1,250,000
B) $75,000
C) $170,000
D) $200,000

Question

Quizplus · Accepted Answer

Using the formula for residual income:

Residual Income = Net Income - (Required Rate of Return x Capital Investment)

$5,000 = Net Income - (0.15 x Capital Investment)

Net Income = $5,000 + (0.15 x Capital Investment)

Also, we know that Investment Turnover = Sales / Capital Investment

2.5 = $500,000 / Capital Investment

Capital Investment = $500,000 / 2.5

Capital Investment = $200,000

Substituting this value into the first equation:

Net Income = $5,000 + (0.15 x $200,000)

Net Income = $35,000

Therefore, the capital investment for Teresa's Taco Ltd was $200,000.

Teresa's Taco Ltd Had the Following Results During the Most