1. What is Average Investment?

Average Investment is the money which is spent on purchasing an equipment. The average is considered because the capital may not be same due to depreciation. It represents the average amount of capital tied up in an asset over its useful life.

2. How Does the Calculator Work?

The calculator uses the Average Investment formula:

Where:

• \( Salvage \) — Salvage value is the book value of an asset after all depreciation has been fully expensed
• \( Capital\ Cost \) — Fixed, one-time expenses incurred on the purchase of equipment
• \( Useful\ Life \) — Number of years the asset is likely to remain in service

Explanation: This formula accounts for the declining value of the asset over time due to depreciation, providing an average investment value that reflects the capital tied up throughout the asset's useful life.

3. Importance of Average Investment Calculation

Details: Calculating average investment is crucial for financial analysis, capital budgeting decisions, and evaluating the efficiency of capital utilization. It helps in determining return on investment and making informed decisions about asset acquisition and replacement.

4. Using the Calculator

Tips: Enter the salvage value in dollars, capital cost in dollars, and useful life in years. All values must be valid (non-negative numbers, useful life must be at least 1 year).

5. Frequently Asked Questions (FAQ)

Q1: Why is average investment important in financial analysis?
A: Average investment helps in calculating accurate return on investment metrics and provides a better understanding of the capital commitment over an asset's entire life cycle.

Q2: How does salvage value affect average investment?
A: Higher salvage value reduces the average investment since more value is recovered at the end of the asset's useful life.

Q3: What is the difference between initial investment and average investment?
A: Initial investment is the total capital outlay at the beginning, while average investment considers the declining value due to depreciation over the asset's useful life.

Q4: When should this formula be used?
A: This formula is particularly useful when evaluating investment projects, comparing alternative assets, or performing capital budgeting analysis where depreciation is a significant factor.

Q5: Can this formula be used for assets with zero salvage value?
A: Yes, the formula works for assets with zero salvage value as well. Simply input 0 for the salvage value parameter.