Answer (B) is correct . Return on investment is commonly calculated by dividing pretax income by total assets available. Residual income is the excess of the return on investment over a targeted amount equal to an imputed interest charge on invested capital. The rate used is ordinarily the weighted-average cost of capital. Some companies measure managerial performance in terms of the amount of residual income rather than the percentage return on investment. Because REB has assets of $500,000 and a cost of capital of 6%, it must earn $30,000 on those assets to cover the cost of capital. Given that operating income was only $25,000, it had a negative residual income of $5,000.
Answer (A) is incorrect because Although the firm’s return on equity investment was 4%, its return on all funds invested was 5% ($25,000 pretax operating income ÷ $500,000).
Answer (C) is incorrect because ROI is commonly based on before-tax income.
Answer (D) is incorrect because The amount of $(22,000) equals the difference between net profit after taxes and targeted income.
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Based on the above information, which one of the following statements is true?? REB has a