Net investment can be defined as the measure of the company’s ability of investing in capital assets. The examples of the net investment can be exemplified as property, plants, equipment, machines and software.
Formula of Net Investment
The formula of net investment can be described as under:-
Net Investment = Capital Expenditures – Non Cash Depreciation
In order to calculate net investment of a company or a business entity we must find out the capital expenditure and the non cash depreciation of the company. Capital expenditure includes the worth of all the assets of the company. It also includes the amount of all the other expenses that are added into these assets. The additional amount can be defined as maintenance, repair, up keeping and installation of these assets.
Non Cash Depreciation over the asset
The assets lose their physical worth and value with the passage of time. There comes accumulated depreciation over the net worth of the assets that can be calculated by using different methods. The two methods are most widely used and they are the straight line method and the declining method of calculating depreciation. The straight line method assumes that the asset depreciates with by an equal amount of its net worth with each passing day where as the declining method assumes that the asset decreases more in the earlier years of its life
Let’s assume that Company XYZ buys a new widget machine for $500,000 and pays someone $10,000 to install the machine in the factory. The company also expects to receive $75,000 from the sale of its old widget machine. Company XYZ is taxed at a rate of 30%.
Using the formula above, Company XYZ’s net investment is:
Net Investment = ($500,000 + $10,000) – [$75,000 – (.30)*($75,000)] = $412,500
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