Asked by Ma Michelle Sison on May 10, 2024
Verified
Worley Inc.reported the following results from last year's operations: 
At the beginning of this year, the company has a $1,000,000 investment opportunity with the following characteristics: 
The company's minimum required rate of return is 17%.
Required:
1.What was last year's residual income?
2.If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall residual income this year?
3.If Westerville's CEO earns a bonus only if residual income for this year exceeds residual income for last year, would the CEO pursue the investment opportunity?
Residual Income
Residual Income is the amount of income that an entity generates after accounting for the cost of capital, measuring the profitability exceeding the required return on investments.
Investment Opportunity
A potential financial investment that may yield returns, including stocks, bonds, real estate, or starting a new business venture.
- Estimate and review earnings beyond regular expenses.
- Analyze the viability of investments by measuring their residual income and return on investment.
Verified Answer
ZK
Zybrea KnightMay 16, 2024
Final Answer :
1.Last year's residual income was: 
2.If the company pursues the investment opportunity, this year's residual income will be:
Average operating assets = $6,000,000 + $1,000,000 = $7,000,000
Net operating income = $1,056,000 + $204,000 = $1,260,000
3.The CEO would pursue the investment opportunity because residual income would increase by $34,000.
2.If the company pursues the investment opportunity, this year's residual income will be:
Average operating assets = $6,000,000 + $1,000,000 = $7,000,000Net operating income = $1,056,000 + $204,000 = $1,260,000
3.The CEO would pursue the investment opportunity because residual income would increase by $34,000.
Learning Objectives
- Estimate and review earnings beyond regular expenses.
- Analyze the viability of investments by measuring their residual income and return on investment.