Explain and contrast return on investment and residual income. Provide examples.

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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

ekkarill92 answered 1 year ago

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