This is the sum of money or capital spent by a company, individual or an entire economy on capital asset minus the depreciation. Capital items are things a company cannot do without, especially if it is just starting so it cannot be dispense with. The new investment makes it clear, the amount of money which was put into the purchase of that capital security which is important for it day to day running and operation. And since the value of these items depreciate with time, depreciation as to be subtracted from net investment cost to arrive at the true value.
WHAT ARE CAPITAL ASSETS?
Capital assets are those items such as property of all types own by a company. It may be tangible or non tangible
WHAT IS NOT CONSIDERED A CAPITAL ASSET?
Not all things owned by a firm are grouped as capital assets. There are some items that are not in the list, the list run thus;
Company stocks, consumables in warehouse or other material that are kept for the sole aim of processing.
Moveable property used by the owners except precious stones and such things as paintings.
Land owned by the company for agricultural purpose etc
It is better at showing the money a company put into it business than gross investment.
HOW TO CALCULATE NET INVESTMENT
We will illustrate using an example below to show how the net investment can be calculated. Let’s assume that a company invested in buying an operational vehicle for five hundred dollars which has lasted for two years and has a residual value of two hundred thousand dollars. The net investment cost is given as;
(500000 – 200000)/ 2
FACTORS THAT DETERMINE NET INVESTMENT COST
There are variations in net investment cost across companies. The things that determine this variation are many. While many of these factors are external, some also depend on the management.
This is one important factor that causes the net investment cost to vary among different groups. Each industry is unique in that it requires a completely different set of tools and equipment to operate and this is what may raise or lower it net investment cost. For instance a company in the petroleum industry will obviously have a higher investment cost than another company in the financial industry.
Depreciation as used here tries to capture or represent the loss in value or drop in original value that is natural to most securities. Of course not all commodities suffer from depreciation, in fact some actually appreciate. But let take for instance a sedan but two years ago, when selling it today, the price is not expected to remain the same as of when it was bought. What is responsible is depreciation, a fall in value.
Net investment cost can show how much a company has locked in it assets and what it can fetch in price, if it decides, for any reason, to sell any of them.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.