Question

Annie runs a fitness center. On December 31 \(2014,\) she bought an existing business with exercise equipment and a building worth \(\$ 300,000\). During \(2015,\) business improved and she bought some new equipment for \(\$ 50,000 .\) At the end of \(2015,\) her equipment and buildings were worth \(\$ 325,000 .\) Calculate Annie's gross investment, depreciation, and net investment during 2015.

Short answer

Gross investment: \$350,000, Depreciation: \$25,000, Net investment: \$25,000.

Step-by-step solution

- Identify Initial Values

Look at the initial values given in the problem. On December 31, 2014, Annie bought equipment and a building worth \(\$300,000\).

- Additional Investment in 2015

Identify any additional investments made during 2015. Annie bought new equipment worth \(\$50,000\) during 2015.

- Calculate Gross Investment

Add the initial value and the additional investments to find the gross investment for 2015. \[ \text{Gross Investment} = \$300,000 + \$50,000 = \$350,000 \]

- Determine End-of-Year Value

At the end of 2015, the value of Annie's equipment and buildings was \(\$325,000\).

- Calculate Depreciation

Depreciation is the reduction in value of the equipment and buildings over the year. Subtract the end-of-year value from the gross investment to find the depreciation. \[ \text{Depreciation} = \$350,000 - \$325,000 = \$25,000 \]

- Calculate Net Investment

Net investment is the gross investment minus the depreciation. \[ \text{Net Investment} = \$50,000 - \$25,000 = \$25,000 \]

Key concepts

Gross Investment

Gross investment refers to the total amount of money spent on purchasing new assets or improving existing ones during a specific period. To calculate it, you add up all expenditures made on new equipment, buildings, or improving existing assets. In Annie's case, she initially invested \(\$300,000\) in exercise equipment and a building. During 2015, she further invested \(\$50,000\) in new equipment. Therefore, her gross investment for 2015 was calculated as follows:

\[ \text{Gross Investment} = \$300,000 + \$50,000 = \$350,000 \]

Understanding gross investment is important as it represents the total economic resources spent on business assets in a given period.

Depreciation

Depreciation refers to the decrease in value of an asset over time due to wear and tear, usage, or obsolescence. For businesses, calculating depreciation is vital to understand the reduction in the value of their assets each year. In Annie’s scenario, she bought assets worth \(\$300,000\) and added \(\$50,000\) worth of new equipment, making a total gross investment of \(\$350,000\). By the end of the year, the value of her equipment and buildings dropped to \(\$325,000\). The depreciation would then be:

\[ \text{Depreciation} = \$350,000 - \$325,000 = \$25,000 \]

Knowing depreciation helps businesses set aside funds to replace assets in the future.

Net Investment

Net investment is the amount spent on assets after accounting for depreciation. It represents the actual addition to an assets' value during a given period. To calculate it, you subtract the depreciation from the gross investment. Using Annie's fitness center as an example:

Given:

• Gross investment: \(\$350,000\)
• Depreciation: \(\$25,000\)

So,
\[ \text{Net Investment} = \$350,000 - \$25,000 = \$25,000 \]

Net investment is crucial as it indicates the net gain in value and shows the actual effectiveness of the investments made by a business.

Asset Valuation

Asset valuation is the process of determining the current worth of a business's assets. This can include physical items like buildings and equipment, and it ensures that financial statements accurately reflect a business’s value. For Annie’s fitness center, the valuation at the start of the year was \(\$300,000\) and, after new investments and depreciation, the end-of-year valuation was \(\$325,000\). Calculating asset valuation involves:

• Assessing initial values
• Adding new investments
• Subtracting depreciation

This accurate representation helps in making better-informed business decisions.

Business Investments

Business investments involve using funds to acquire or improve assets with the expectation of generating future economic benefits. These investments can be in equipment, technology, buildings, or even intangible assets. According to the exercise, Annie’s business investments for the year included:

• Initial purchase of \(\$300,000\) assets
• Adding \(\$50,000\) new equipment

Understanding the nature and purpose of these investments is essential to ensure they contribute effectively to the business's growth. Analyzing investments helps business owners strategize on the best ways to utilize available resources for maximum returns.