Which condition indicates acceptance of a project based on residual income calculations?

In residual income calculations, the acceptance of a project is indicated when the residual income (RI) is greater than 0. Residual income represents the net income generated by an investment after accounting for the cost of capital required to fund the project.

When RI is greater than 0, it implies that the project is generating income in excess of its cost of capital, signifying that it is adding value to the company. This positive outcome means that the return is sufficiently exceeding the minimum required return, warranting approval for moving forward with the project.

If RI were to equal 0, it would suggest that the project is only generating enough income to cover its cost of capital but is not adding any additional value, which would generally not be sufficient for acceptance. Conversely, if RI is less than 0, it indicates that the project is not generating enough income to cover its costs, leading to a net loss and a recommendation against its acceptance. The notion that RI must exceed total costs is a misunderstanding, as residual income specifically assesses performance over and above the cost of capital rather than total costs incurred in the project.

In summary, residual income above zero signifies that the project meets or exceeds expected performance levels, thus justifying its acceptance.