Residual income is income that a person continues to make after the work he has put into a project has been completed.
In corporate finance, residual income can be used as a measure of corporate performance.
Formula to calculate residual income.
In most cases, the minimum required rate of return is equal to the cost of capital.
Example:
Suppose the net operating income of an investment center was $500,000 and operating assets of $2,500,000. The cost of capital is 12%. Calculate the residual income.
Thus, the residual income for the investment center was $ 200,000.
