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Average Investment Formula:
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The Average Investment represents the average amount of capital invested in an equipment over its useful life when the salvage value is zero. This calculation is important for financial analysis and capital budgeting decisions.
The calculator uses the Average Investment formula:
Where:
Explanation: The formula calculates the average investment by considering the declining value of the asset over its useful life when there is no salvage value at the end.
Details: Calculating average investment is crucial for determining return on investment, making capital budgeting decisions, and evaluating the financial performance of assets over their useful life.
Tips: Enter the useful life in years and capital cost in dollars. Both values must be positive numbers to get a valid calculation.
Q1: Why is salvage value assumed to be zero in this calculation?
A: This assumption simplifies the calculation and is often used when the asset has no resale value at the end of its useful life.
Q2: How does useful life affect the average investment?
A: Longer useful life typically results in a lower average investment as the capital cost is spread over more years.
Q3: Can this formula be used for assets with salvage value?
A: No, this specific formula is designed for cases where salvage value is zero. Different formulas apply when salvage value is present.
Q4: What types of assets typically have zero salvage value?
A: Assets that become obsolete, have no resale market, or are fully depreciated over their useful life often have zero salvage value.
Q5: How is average investment used in financial analysis?
A: It's used to calculate return on investment, assess capital efficiency, and make comparisons between different investment opportunities.