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Dear Sir,
I have noted that to calculate the Average investment we add our initial investment with Residual Value and divide it with 2.
Sir, my question is that shouldn’t it be another way around. At the end of the project, we are getting the investment’s residual value back, so our overall investment is going down by the amount of residual value.
Why are we adding residual value to calculate the average investment instead of deducting it?
Like if I have invested $10,000 and getting $2,000 at the end of the project, the actual money that went out of my pocket is $8,000. The point is why $12,000 and why not $8,000?Thank you.
ARR is an accounts based measure, and the average investment is the average value in the SOFP.
If you have $10,000 in your pocket at the start of the day and have nothing left at the end of the day, then on average you had $5,000 in your pocket.
If, on the other hand, you had $10,000 in your pocket at the start of the day and still had $2,000 left at the end of the day, then on average you had more than $5,000. On average you had $6,000.
(Or to put it another way, although you did spend a net $8,000, half way through the day you will have spent $8,000/2 = $4,000. Therefore half way through the day you would have $10,000 – $4,000 = $6,000.)
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