Chapter 26, Problem 1SPPA

To determine

To find:

The gross investment, depreciation and net investment of Mr. T.

Explanation of Solution

Given information:

Capital stock at January 1, 2016 is $300,000.

Additional purchase value is $180,000.

The market value of assets at end of 2016 is $400,000.

Calculation of gross investment:

  $\begin{array}{c}\text{Gross}\text{investment}=\left(\begin{array}{l}\text{Capital}\text{stock}\text{in}\text{January}\text{2016}\\ +\text{Purchase}\text{value}\text{during}2016\end{array}\right)\\ =\left(\text{\$300,000}+\text{\$180,000}\right)\\ =\$480,000\end{array}$

Calculation of depreciation:

  $\begin{array}{c}\text{Depreciation}=\left(\begin{array}{l}\text{Gross}\text{investment}\text{in}\text{2016}\\ -\text{Market}\text{value}\text{of}\text{assets}\text{at}\text{end}\text{of}\text{2016}\end{array}\right)\\ =\left(\text{\$480,000}-\text{\$400,000}\right)\\ =\$80,000\end{array}$

Calculation of net investment:

  $\begin{array}{c}\text{Net}\text{investment}=\left(\begin{array}{l}\text{Gross}\text{investment}\\ -\text{Depreciation}\end{array}\right)\\ =\left(\text{\$300,000}-\$400,000\right)\\ =-\$100,000\end{array}$

Economics Concept Introduction

Gross investment:

Gross investment refers to the total amount of spending by a firm on the purchase of new capital within the financial year, and this does not account for depreciation.