Question
In: Accounting
Explain and contrast return on investment and residual income. Provide examples.
Explain and contrast return on investment and residual income.
Provide examples.
Solutions
Expert Solution
| Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. | |||||
| Return on Investment is a performance measure that measures the amount of return on an investments, relative to investment costs. | |||||
| Each of these measurements enables company management to determine the profit potential of investments in capital improvement, proposed projects or potential acquisitions | |||||
| Example: | |||||
| Investment in Equipment | $500,000 | ||||
| Above investment will generate Revenue of 100000 and have to incur cost of 30000 | |||||
| Hence, Net Income | 100000-30000 | $ 70,000 | |||
| ROI | 70000/500000 | 14.00% | |||
| Residual Income: | |||||
| Residual Income is income over and above minimum required return. | |||||
| Considering above example, if minimum Required rate of return for company is 10% | |||||
| Then Minimum Required Income | 500000*10% | $ 50,000 | |||
| However, Actual Income | $ 70,000 | ||||
| Residual Income | 70000-50000 | $ 20,000 | |||
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Gross margin
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Administrative expense
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