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Increasing residual income involves enhancing the amount of income generated above the minimum required return on an investment. One effective strategy for a company is to invest in high-return projects. When a company identifies and invests in projects that offer returns above its cost of capital, it effectively increases its overall profitability. These investments not only contribute to higher earnings but also elevate the company’s assets, thereby enhancing the residual income calculation.

For instance, if a company has a cost of capital of 8% and invests in a project that offers a return of 12%, the additional income generated from that investment will contribute positively to the overall residual income. This approach leverages the threshold where profits exceed expectations, providing value to shareholders and stakeholders alike.

While the other methods mentioned can contribute to better financial health, they do not directly impact the concept of residual income in as immediate a manner. Increasing sales can enhance earnings but may also bring increased costs that dilute the additional profit. Reducing liabilities can improve the balance sheet, but it does not directly lead to an increase in income generation. Lowering operational costs can increase net income, yet without focusing on high-return investments, the overall residual income may not see a corresponding increase as effectively as through targeted investments.