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
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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
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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