Applying Excel: Exercise (Part 2 of 2)
1 answer:
Answer:
ROI 15%
Residual Income $1,350,000
Explanation:
Residual Income is the difference between net income of the company and the required rate of return. It determines the excess of income generate than the minimum return. The formula to calculate the residual income is,
RI = Net operating Income - (Required rate of return * Cost of operating assets)
RI = $4,500,000 - (21% * $15,000,000 )
RI = $1,350,000
ROI =
Capital Employed = Sales - Average operating assets
ROI = 15%
Residual income is positive when the department has meet the minimum return requirement. Minimum return is the return that is required by the company stakeholders. The particular projects and activities are selected on the basis of residual income.
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Points are an upfront charge by the lender that is part of the price of a mortgage. Points are expressed as a percent of the loan amount, with 2 points being 2%. On a $400,000 loan,
solutions
Loan Amount $400,000
Loan Term (in months) 360 months
mortgage I mortgage II
Interest Rate 6.000% 5.750%
Points 0.00% 2.00%
Loan Payment Amount $2,398.20 $2,334.29
Costs Over 30 — Year Period
Points Paid in Cash
$0 $8,000
Monthly Costs -
Principal and Interest $863,348 $840,340
Lost Interest
On Points $0 $0
On Monthly Costs $0 $0
Total Costs $863,348 $848,340
Reduction in Loan Balance $400,000 $400,000
Total Cost Offsets $400,000 $400,000
Cost Net of Offsets $463,348 $448,340
Conclusions - Based on a 30 Year Holding Period
Over the next 30 years the High Interest / Low Points Loan Will Save You: $15,008
In Months, the Break-even Point Occurs in 1 months
In Years, the Break-even Point Occurs in 0.0833 years