# Weird RI Formula

In CFAI Book 4, Reading 45, Question 5, they seem to construct a formula for residual income: Residual Income=[(NOPAT/Assets) - WACC]*(Assets) Have you seen this? Do we need to memorize it?

RI = NOPAT/Assets*Assets - WACC*Assets RI = NOPAT - WACC*IC RI = NOPAT - \$WACC Now It should sound familiar?

RI = NOPAT - WACC*IC

IC = Invested Capital Mult or div anything 1st doesn’t matter. BODMAS rule of maths.

looks more like the formula for EVA not RI.

planner Wrote: ------------------------------------------------------- > looks more like the formula for EVA not RI. I think you’re right.

Yeah but I think swaption is saying that the RI and EVA answer should be the same, so it still tells you what the theoretical RI is.

CFAI Book 4, Reading 42, Question 5

Use the standard formula to calculate RI.

Untax NOPAT = (10 / 0.6) = 16.677

Deduct intrests: 16.67 - 4.5 = 12.17

Tax it. 12.17 * 0.6 = 7.302 = Net Income

Equty charge = .12 * 50 = 6.0

RI = 7.3 - 6.0 = 1.3

The results is the same but do not need to memorize formula.

Can you pla deco firm that Invested Capital here is Equity + long term debt only. It’s not the same as total asset