Sam L H. answered • 10/08/15

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The answer is A) 625,000

The assumption I made is that the 20% does not include the 12% cost of capital. So if the 12% cost of capital to be considered then we need a larger pool of assets to give us the $50,000 return. The way I arrived at the larger investment is by dividing 50,000 over .08 which will give you an investment pool equal to $625,000, and this is option A answer above. The 0.08 derived from 20%-12%.

To test our numbers 625,000 X.20 = 125,000

Less Cost of Capital 625,000 x .12= 75,000

the residual income = 50,000

Sagnik B.

01/21/15