Tinsley Plastics manufactures plastic bottles used for beverages and household c

Question

Tinsley Plastics manufactures plastic bottles used for beverages and household cleaners. The average net book value (NBV) of assets during the quarter is estimated as $540,000. If the required rate of return is 12% on average assets and the firm wants to have residual income (RI) of $104,000 for this quarter, what must its profits be?

Tinsley Plastics manufactures plastic bottles used for beverages and household cleaners. The average net book value (NBV) of assets during the quarter is estimated as $540,000. If the required rate of return is 12% on average assets and the firm wants to have residual income (RI) of $104,000 for this quarter, what must its profits be?

Explanation / Answer

Profits = NBV * Required rate of return + Residual Income (RI)

= 540000*12% + 104000

= $ 168,800

Therefore, the firm's profits must be $ 168,800

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