Question

Sales $1,100,000 Average operating assets $600,000 Residual income $42,000 Return on investment 22% The company's required rate of return was:

Answer 1

Answer:

15%

Explanation:

Required rate of return = Net operating income other than income others / Average operating assets

Required Rate of Return = $90,000/$600,000

Required Rate of Return = 0.15

Required Rate of Return = 15%

Thus, the company's required rate of return is 15%

Workings

Return on Investment = Net Profit/Total investments*100

Net income = Return on investment*Total Investments

Net income = $600,000 * 22%

Net income = $132,000

Thus, Net Operating income = Net income - Residual income = $132,000 - $42,000 = $90,000.