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.
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.