A factory purchases machinery worth \(₹50\) lakh. At the end of the year, depreciation is \(₹5\) lakh. What is the Net Investment made by the firm?
Net Investment Calculation Explained
This question asks us to determine the Net Investment made by a firm, considering the initial purchase of machinery and the depreciation that occurred over the year.
Understanding Investment Terms
- Gross Investment: This is the total amount spent on purchasing new capital assets, like machinery. In this case, the Gross Investment is the initial purchase value of the machinery, which is \(₹50\) lakh.
- Depreciation: This represents the decrease in the value of an asset over time due to wear and tear, usage, or obsolescence. Here, the depreciation is given as \(₹5\) lakh.
Calculating Net Investment
The Net Investment represents the actual increase in the capital stock of the firm. It is calculated by subtracting the depreciation from the gross investment.
The formula is:
\(\text{Net Investment} = \text{Gross Investment} - \text{Depreciation}\)
Step-by-Step Calculation
- Identify the Gross Investment: The factory purchased machinery worth \(₹50\) lakh. So, Gross Investment = \(₹50\) lakh.
- Identify the Depreciation: The depreciation at the end of the year is \(₹5\) lakh.
- Apply the formula: Substitute the values into the Net Investment formula. \(\text{Net Investment} = ₹50 \text{ lakh} - ₹5 \text{ lakh}\)
- Calculate the result: \(\text{Net Investment} = ₹45 \text{ lakh}\)
Therefore, the Net Investment made by the firm is \(₹45\) lakh.
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