[flop310]

I am confused if when making the calculations is income before or after taxes for both ROI and Residual? Please advice. Thank you

[Jennifer241]

Return on Investment = Net Income – Interest + Taxes / Average Total Assets ; short version ROI=NOPAT/Avg Assets

Residual Income = Operating Income – (Average Total Assets * target ROR) ; short version RI=OI – (Avg Assets * RROR)

Key to remembering is that ROI is after interest and taxes, while RI is before interest and taxes.

When I memorized my formula's I wrote NOPAT in place of Net Operating Profit After Taxes, and OI for Operating Income.

AUD - Jan 9,13 Pass
REG - Aug 30,13 Pass
BEC - Oct 26,13 Pass
FAR - Dec 4,13 Pass

Licensed CPA in the state of Oregon

[flop310]

Thank you!

However I am going over this problem and to find ROI you dont use NOPAT.I am confused

REB Service Co. is a computer service center. For the month, REB had the following operating statistics:

Sales $450,000

Operating income 25,000

Net profit after taxes 8,000

Total assets 500,000

Shareholders’ equity 200,000

Cost of capital 6%

Based on the above information, which one of the following statements is true? REB has a

A. Residual income of $(5,000).

B. Return on investment of 4%.

C. Residual income of $(22,000)

D. Return on investment of 1.6%.

Correct answer is A. Note that D is incorrect because because that computation would have used NOPAT

Any suggestions? Thanks

[haydenrobbie]

Er….Any idea why my 2013 Becker BEC Review book [pg B3-33] states, “The formula for residual income is Net Income (from the income statement) – Required return, where required return = Net Book Value x Hurdle Rate”? and that [pg B3-30] ROI is Net Income / Average Assets… ?

REG 92
FAR 92
AUD 99
BEC 8/11/13

[Author]

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