A company has a capital employed of $200,000. It has a cost of capital of 12% per year. Its residual income is $36,000. What is the company’s return on investment?

(36000 + (200000 x 12٪)) / 200000 = 30٪

The cost of capital is the minimum expected return on equity capital suppliers, investors and creditors. The cost of capital is used to make investment decisions. The expected return of any investment opportunity should not be less than the cost of the capital needed to fund it. It is also used to evaluate new and existing investment projects. The cost of capital is used as a discount rate to reach the present value of the project's future cash flows.

(36,000 + (200,000 x 12%))/200,000 = 30%