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Hi tutor,
I am confused at how the average investment figure is calculated, and as far as I know the standard formula to derive the figure is:
( Capital cost – disposal value ) / 2
The answer from one question (BPP practice bank question 22) gave:
[ (total assets – current liabilities) + total equity – amount added to reserves] / 2
Can you please explain this to me?
I assume you are referring to the average investment when calculating the ARR?
If you are then it is not (capital cost – disposal value) / 2.
It is (capital cost + disposal value)/2 (for an explanation of this you need to watch my free lectures).I am guessing you mean the practice bank in the BPP Study Text. If so, then I do not have it – I only have the Revision Kit, and so without seeing the question I cannot really explain.
(Although it is probably to do with the fact that the total long-term capital (equity + long-term debt borrowing) is always equal to total assets less current liabilities)
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