Worley Incorporated 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 chief executive officer earns a bonus only if residual income for this year exceeds residual income for last year, would the chief executive officer pursue the investment opportunity?

Question

Worley Incorporated 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 chief executive officer earns a bonus only if residual income for this year exceeds residual income for last year, would the chief executive officer pursue the investment opportunity?

SHRISHTY DAYAL · Accepted Answer

Final Answer :

1. Last year's residual income was:

2. If the company pursues the investment opportunity, this year's residual income will be:
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 chief executive officer would pursue the investment opportunity because residual income would increase by $34,000.

Average operating assets = $6,000,000 + $1,000,000 = $7,000,000
Net operating income = $1,056,000 + $204,000 = $1,260,000
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 chief executive officer would pursue the investment opportunity because residual income would increase by $34,000.

3. The chief executive officer would pursue the investment opportunity because residual income would increase by $34,000.

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