Hi there! I am just having some issues grasping the concept of Residual Income in Managerial
Accounting and was wondering if anyone could help. My professor suggested a scenario that I should practice with, but I am still having troubles understanding it completely. Here is the scenario:
A company has capital employed of $10 million and currently earns an ROI of 15% per year. It can make an additional investment of $2 million for a 5 year life. The average net profit from this investment would be 14% of the original investment. The division’s cost of capital is 12%.
What I need help to understand, is how to calculate the Residual Income BEFORE and AFTER the investment.