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28 April, 15:39

For the period just ended, Trek Corporation's Trailer Division reported profit of $171 million and invested capital of $610 million. Assuming an imputed interest rate of 20%, which of the following choices correctly denotes Trailer's return on investment (ROI) and residual income? ROI Residual Income A. 28% $49 million B. 28% $ (49 million) C. 20% $49 million D. $49 million 28% E. None of the answers is correct.

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  1. 28 April, 15:56
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    Option (A) is correct.

    Explanation:

    Return on investment = (operating profit : Invested capital) * 100

    = ($171 million : $610 million) * 100

    = 0.28 * 100

    = 28%

    Residual income:

    = operating profit - (Invested capital * Imputed interest rate)

    = $171 - ($610 * 20%)

    = $171 - $122

    = $49 million

    Therefore, Trailer's return on investment (ROI) and residual income is 28% and $49 million, respectively.
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