# What is the residual income?

Computes the residual income of a division or project: its operating income minus the minimum required return on its invested capital, with the capital charge and ROI.

- Page: https://www.acalculator.org/finance/residual-income-calculator
- JSON spec: https://www.acalculator.org/finance/residual-income-calculator.json
- Version: 27312cec2a06

## Default answer

Example with the default inputs (Operating income (profit) $7,000,000.00, Invested capital One amount, Invested capital (operating assets) $10,200,000.00, Minimum required rate of return 15%): Earning $7,000,000.00 on $10,200,000.00 of capital at a 15% required return leaves a residual income of $5,470,000.00.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| income | Operating income (profit) | The profit of the division or project for the year. Negative for a loss. |
| basis | Invested capital | Type one amount of capital, or the amounts at the start and the end of the year to use their average. |
| capital | Invested capital (operating assets) | The assets the division or project uses, as your company measures them (often at net book value). |
| start | Capital at the start of the year | The operating assets on the first day of the year. |
| end | Capital at the end of the year | The operating assets on the last day of the year. |
| rate | Minimum required rate of return | The lowest yearly return the company accepts on the capital it invests. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| ri | Residual income | Operating income − invested capital × minimum required rate of return. |
| charge | Capital charge (required return) | Invested capital × minimum required rate of return. |
| capitalUsed | Invested capital used | The capital the charge is taken on. |
| roi | Return on investment (ROI) | Operating income ÷ invested capital × 100. |

## Method

RI = operating income − invested capital × minimum required rate of return; ROI = operating income ÷ invested capital.

## Assumptions

- Income and capital are measured the same way your company measures them for its divisions (for example net book value).
- The average capital is (start + end) ÷ 2 for the year.
- Arithmetic is exact on the typed decimals; money rounds once to the cent and the ROI to 2 decimals.

## Worked examples

1. income = $250,000.00, basis = amount, capital = $1,500,000.00, rate = 18% gives ri = -$20,000.00, charge = $270,000.00, roi = 16.666667%. Source: OpenStax, Principles of Accounting, Volume 2: Managerial Accounting, 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added (RI = profit − invested capital × minimum required rate of return; average capital = (start + end) ÷ 2). https://openstax.org/books/principles-managerial-accounting/pages/12-3-evaluate-an-operating-segment-or-a-project-using-return-on-investment-residual-income-and-economic-value-added: $250,000 − ($1,500,000 × 0.18) = −$20,000.
2. income = $7,000,000.00, basis = average, start = $10,000,000.00, end = $10,400,000.00, rate = 15% gives ri = $5,470,000.00, capitalUsed = $10,200,000.00, roi = 68.627451%. Source: OpenStax, Principles of Accounting, Volume 2: Managerial Accounting, 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added (RI = profit − invested capital × minimum required rate of return; average capital = (start + end) ÷ 2). https://openstax.org/books/principles-managerial-accounting/pages/12-3-evaluate-an-operating-segment-or-a-project-using-return-on-investment-residual-income-and-economic-value-added: $7,000,000 − ($10,200,000 × 0.15) = $5,470,000.
3. income = $8,000,000.00, basis = average, start = $12,000,000.00, end = $12,400,000.00, rate = 15% gives ri = $6,170,000.00, capitalUsed = $12,200,000.00, roi = 65.57377%. Source: OpenStax, Principles of Accounting, Volume 2: Managerial Accounting, 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added (RI = profit − invested capital × minimum required rate of return; average capital = (start + end) ÷ 2). https://openstax.org/books/principles-managerial-accounting/pages/12-3-evaluate-an-operating-segment-or-a-project-using-return-on-investment-residual-income-and-economic-value-added: $8,000,000 − ($12,200,000 × 0.15) = $6,170,000.

## FAQ

### What is residual income?

Residual income (RI) is the profit a division or project earns above the minimum return the company requires on the capital it uses. A positive RI means it earns more than that minimum; a negative RI means it falls short.

### How do I calculate residual income?

Multiply the invested capital by the minimum required rate of return to get the capital charge, then subtract the charge from the operating income. A $1,500,000 machine that earns $250,000 at an 18% required return has RI = 250,000 − 1,500,000 × 0.18 = −$20,000.

### What is the difference between residual income and ROI?

ROI is a percent: income ÷ invested capital. Residual income is a dollar amount above a required return. A division with a high ROI may turn down a project whose ROI is lower than its own but still above the company’s required rate; that project still has a positive residual income.

### What required rate of return should I use?

The rate your company sets as the minimum return on its projects and investments. It is often close to the company’s cost of capital, but it can be higher.

### Should I use average capital or year-end capital?

Use the measure your company uses for its divisions. A common choice is the average of the capital at the start and the end of the year, so a division is not judged on one day’s balance. Choose "Average of start and end" to use it.

### Is residual income the same as economic value added (EVA)?

EVA is a close relative: after-tax income minus invested capital times the weighted average cost of capital (WACC). Type after-tax income and the WACC here to get EVA. A machine that earns $150,000 after tax on $1,500,000 at a 9% WACC has an EVA of 150,000 − 135,000 = $15,000.

## Sources

- OpenStax, Principles of Accounting, Volume 2: Managerial Accounting, 12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added: RI = project profit − project invested capital × minimum required rate of return; average capital assets = (start + end) ÷ 2; the donut machine (−$20,000), SkyHigh Superball ($5,470,000 and $6,170,000) and EVA examples. https://openstax.org/books/principles-managerial-accounting/pages/12-3-evaluate-an-operating-segment-or-a-project-using-return-on-investment-residual-income-and-economic-value-added (retrieved 2026-10-18)