Gross investment

Gross investment is the amount a company invests in business assets that does not account for
any depreciation. The gross figure more accurately reflects the company's actual financial
commitment to an asset from which it can derive a return on investment.Figuring gross
investment is one way of factoring a businesss investment in an asset, and it is commonly total
investment without factoring in the assets depreciation. If the business does not remember how
much it spent on the asset, then one way of figuring out gross investment is to add the assets
current value and depreciation. For example, if land is worth $100,000 USD and has been
depreciated by $20,000 USD, the two are added together and the total investment is $120,000
USD. An asset also may rise in value, such as if land and property values increase; in this case,
the amount of increased value would be subtracted from the current value.
Gross investment is used for nearly anything in which a business invests, such as equipment, property
or land. Return on investment (ROI) is a figure that determines whether the investment was a success,
and the gross investment is commonly used in this calculation.
Definition of 'Net Investment'

Net investment is the amount spent by a
company or an economy on capital assets, or
gross investment, less depreciation.It helps give
a sense of how much money a company is
spending on capital items (such as property,
plants and equipment), which are used for
operations. Subtracting depreciation from this
amount, or capital expenditure (since capital
assets lose value over their life because of wear
and tear, obsolescence, etc.), provides a more
accurate picture of the investment's actual value.
Capital assets include property, plants,
technology, equipment and any other assets that
can improve the productive capacity of an
enterprise.


If gross investment is consistently higher than
depreciation, net investment will be positive,
indicating that productive capacity is increasing.
Conversely, if gross investment is consistently
lower than depreciation, net investment will be
negative, indicating that productive capacity is
decreasing, which can be a potential problem down
the road. This is true for all entities, from the
smallest companies to the largest economies.

Net investment is therefore a better indicator than
gross investment of how much an enterprise is
investing in its business, since it takes depreciation
into account. Investing an amount equal to the total
depreciation in a year is the minimum required to
keep the asset base from shrinking. While this may
not be a problem for a year or two, net investment
that is negative for a prolonged time period will
render the enterprise uncompetitive at some point.

A simple example will show how net investment is
calculated. Suppose a company spends $1 million
on a new machine that has an expected life of 30
years and has a residual value of $100,000. Based
on the straight-line method of depreciation, annual
depreciation would be $30,000 (i.e. {$1,000,000 -
$100,000} / 30). Therefore, the amount of net
investment at the end of the first year would be
$970,000.

Continued investment in capital assets is critical to
an enterprise's ongoing success. The net
investment amount required for a company
depends on the sector it operates in, since all
sectors are not equally capital intensive. Sectors
such as industrial products, goods producers,
utilities and telecommunications are more capital-
intensive than sectors such as technology and
consumer products. Therefore, comparing net
investment for different companies is most
relevant when they are in the same sector.