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Name the two ways in which ROI can be generated. What is residual income?

  • Name the two ways in which ROI can be generated.
  • What is residual income?
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Answer #1

ROI is calculated by Normal Approach in which Net Profit Earned is divided by Total Investment made and classified as a Percentage.

ROI = (Net Profit/ Total Investment ) * 100

ROI is calculated by IRR approach in case of uneven cash flows by finding the rate of return where Cash Inflow is equal to Cash Outflow.

Residual Income is the net income generated in excess of the minimum required rate of return. For e.g if a company invest $2million and expects a minimum return of 12% so the minimum return amounts is $240,000. However if the investment return $360,000 than $120000 is Residual Income.

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