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16 October, 18:19

At the start of the year, your firm's capital stock equaled $100 million, and at the end of the year it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment during the year equaled A) $1 million B) $5 million. C) $7 million D) $25 million

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  1. 16 October, 18:41
    0
    The answer is D.

    Explanation:

    Net investment equals Gross investment minus depreciation.

    Net investment equals Investment at the beginning of the year minus Investment at the end of the year.

    Net investment = $105 million - $100 million.

    Net investment = $5million.

    Depreciation = 20% of investment at the start of the year

    = 20% of $100million

    = $20million.

    Gross investment is therefore,

    $5million + $20million

    =$25 million
  2. 16 October, 18:43
    0
    Option D,$25 million is the correct answer.

    Explanation:

    The net investment formula can be used to compute gross investment by changing the subject of the formula as shown below:

    Net investment = gross investment minus depreciation

    Net investment = Closing capital stock minus opening capital stock

    closing capital stock is $105 million

    opening capital stock is $100 million

    net investment=$105 million-$100 million=$5 million

    Gross investment is unknown

    depreciation=opening capital stock * depreciation %

    depreciation=$100 million*20%

    =$20 million

    $5 million=gross investment-$20 million

    gross investment = $5 million+$20 million

    gross investment = $25 million
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