Enter the operating income, minimum required return, and the operating assets into the calculator to determine the residual income.
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Residual Income Formula
The following formula is used to calculate a residual income
RI = OI - (mrr*OA)
- Where RI is the residual income ($)
- OI is the operating income ($)
- mrr is the minimum required return rate (.)
- OA is the operating assets ($)
Residual Income Definition
A residual income is defined as the total income received or leftover after all debts and obligations have been paid. The case of the formula above, this is exploring the residual income of a company with respect to the performance of its capital investment.
How to calculate residual income?
First, determine the total operating income generated by the investment. For this example, we are analyzing a company that invested in a real-estate project that generates an operating income of $50,000.00 per year.
Next, determine the minimum required return of the asset. The real-estate project in this example has a minimum required return of 4% or .04 in decimal terms.
Next, determine the total operating asset value. For this example, the operating asset value is $500,000.00.
Finally, calculate the residual income. Using the formula above, the residual income is calculated as:
RI = OI – (mmr*OA)
= $50,000.00 – (.04*$500,000)