This video shows how to calculate Residual Income.

Residual Income is the profit earned (e.g., by a department) above and beyond the required rate of return. Residual Income is calculated as follows:

Residual Income = Income – (Required Rate of Return * Capital Invested)

Residual Income is frequently used to evaluate the performance of a division within a company. In such a case, the required rate of return would be set by the company’s top management. Assuming that a division posted income of $45,000 and used $200,000 of capital with a 10% required rate of return, the Residual Income of the division would be $5,000.