![]() ![]() The final step is to subtract the target (desired) income amount from the project’s operating income ($125k). The more excess income there is above the target (desired) income, the more profitable the project is. To determine the project’s residual income, we’ll start by multiplying the minimum required rate of return (20%) by the average operating assets ($225k).Īs mentioned earlier, the resulting amount – $45k in our example – represents the target (desired) income from the project. If we assume the minimum required rate of return is 20%, what is the project’s residual income? Project Residual Income Calculation Analysis The value of the operating assets at the beginning of the period (Year 0) was $200k, while the value was $250k at the end of the period (Year 1).īy adding those two figures and dividing them by two, the average operating assets equal $225k. The project is projected to generate $125k in operating income in Year 1. Suppose a company is attempting to decide whether to pursue a project or pass on the opportunity. Project Income and Operating Assets Assumptions We’ll now move to a modeling exercise, which you can access by filling out the form below. Residual Income Calculator – Excel Template ![]() Of course, the metric will not dictate corporate decisions on its own, but projects with positive residual income are more likely to be accepted internally because of the increased economic incentive.
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