Question

On January 12014 , the London Taxi Company owned 5 cabs valued at \(£ 150,000 .\) During 2014 the London Taxi Company bought 4 new cabs for a total of \(£ 200,000 .\) At the end of 2014 , the market value of all of the cabs was \(£ 300,000\). Calculate the London Taxi Company's gross investment, depreciation, and net investment.

Short answer

Gross investment: £200,000, Depreciation: £50,000, Net investment: £150,000.

Step-by-step solution

Understand the Given Data

Identify all the given information: 1. Initial value of cabs on January 1, 2014: £150,000 2. Number of cabs bought during 2014: 4 cabs for £200,000 3. Market value of all cabs at the end of 2014: £300,000 Calculate the total value of cabs bought and their contribution to the calculations.

Calculate Gross Investment

Gross investment is the total amount spent on purchasing new assets. The London Taxi Company bought 4 new cabs for £200,000. Therefore, the gross investment is £200,000.

Calculate Depreciation

Depreciation is the reduction in value of assets over time. First, find the total value of all cabs at the beginning of 2014 and add the cost of the new cabs: Initial value of cabs: £150,000 Value of new cabs: £200,000 Total value of cabs at the beginning and during 2014: £150,000 + £200,000 = £350,000 Next, subtract the market value of the cabs at the end of 2014: Depreciation: £350,000 - £300,000 = £50,000

Calculate Net Investment

Net investment is the gross investment minus depreciation. Use the values calculated in the previous steps: Gross investment: £200,000 Depreciation: £50,000 Net investment: £200,000 - £50,000 = £150,000

Key concepts

gross investment

Gross investment is the total amount spent on purchasing new assets during a specific period. It does not account for any losses in the value of existing assets. In our example, the London Taxi Company bought 4 new cabs for a total of £200,000. This amount represents the company's gross investment for the year 2014. When thinking of gross investment, remember it is solely about new purchases, not taking into account any devaluation of current assets.

depreciation

Depreciation refers to the reduction in value of an asset over time due to wear and tear, age, or obsolescence. For the London Taxi Company example, we start by calculating the total value of all cabs at the beginning of the year, plus the cost of the new cabs. Initially, the values are £150,000 (existing cabs) and £200,000 (new cabs). Adding these gives £350,000.
Then, we subtract the market value of all cabs at the end of the year (£300,000) from the total value at the beginning and during the year (£350,000). This results in depreciation of £50,000. Essentially, depreciation tells us how much value the assets have lost over the course of the year.

net investment

Net investment is the gross investment amount minus depreciation. It represents the increase in the value of the company's assets after accounting for depreciation. For the London Taxi Company:

• Gross investment: £200,000 (total spent on new cabs)
• Depreciation: £50,000 (value lost over the year)

Therefore, net investment is given by: \( 200,000 - 50,000 = 150,000 \). This means that despite the loss in value from depreciation, the overall value of the company's assets increased by £150,000 during the year.