What is the difference between:
Gross investment and net investment? Provide a real world example of each one. (10)
Net investment can be defined as the total amount spent by any economy or economic agent on the purchase of plant, machinery or any other assets.
Depreciation means wear and tear of existing assets.
When depreciation is substracted from gross investment, then net investment is got.
Gross investment=net investment+depreciation
When few other machines are added in the existing plant and machinery, the total amount of plant and machinery are called gross investment.
When depreciation is substracted from gross investment, then the net investment is got.
So if a plant has the total gross investment of $20,000 and a new investment is done in the next year of $10,000.
Then total gross investment is =20,000+10000
=$30,000
If the depreciation on the existing investment was 10% per year, then the total depreciation will be 2000.
Hence net investment will be=30,000-2000
=$28,000
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