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16 September, 04:21

Pankey Inc. has a $700,000 investment opportunity that would involve sales of $1,050,000, a contribution margin ratio of 40% of sales, and fixed expenses of $325,500. The company's minimum required rate of return is 18%. The residual income for this year's investment opportunity is closest to:

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  1. 16 September, 04:38
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    Residual income = $666,270

    Explanation:

    The residual income is the amount left after the opportunity cost of capital deducted from the net operating income

    Operating income=Contribution margin - Fixed cost

    Operating income = 1,050,000 - 325,500 = $724,500

    Residual income = Net income - (cost of capital * capital invested)

    =$724,500 - (18% * 323,500) = 666270

    Residual income = $666,270
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