About Residual Income Calculator (Formula)
The Residual Income Calculator is a financial tool used in performance evaluation and investment analysis to determine how well an investment or project generates excess income beyond a specified rate of return. The formula for calculating residual income is:
Residual Income (RI) = Net Income – (Minimum Required Rate of Return × Initial Investment)
Where:
- RI represents the residual income, often measured in the currency used for financial analysis (e.g., dollars, euros).
- Net Income is the total income generated by the investment or project.
- Minimum Required Rate of Return is the desired or expected rate of return on the initial investment, often expressed as a percentage.
- Initial Investment is the amount of capital invested to initiate the project or investment.
The residual income formula assesses the performance of an investment by comparing the actual net income generated to the income that would be expected to be earned if the investment achieved the desired rate of return. A positive residual income indicates that the investment generated more income than expected, while a negative residual income suggests that it fell short of the target return.
The Residual Income Calculator is useful for investors, financial analysts, and managers when evaluating the profitability and performance of investments and projects, helping them make informed decisions about resource allocation and investment strategies.