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Nw co is considering investing $46000 in a new delivery that will last for 4 years after which time will be sold for 7000 $. Depreciation on straightline.
Year 1 $16500
Average profit is after depreciation but in this question they don’t deduct the depreciation to find the average investment. Why is that???
The average investment is the average of the initial cost (46,000) and the final value (7,000).
That is how we always calculate it, as I explain in my free lectures.
(The difference between the 46,000 and the 7,000 is the total depreciation, but that is of no relevance to calculating the average amount invested over the period.)
But why it is of no relevance to find the depreciation?
Because it is not needed to calculate the average investment. The average investment in the SOFP is the average of the initial value and the final value as I explained in my previous reply.
Have you watched my free lectures on the ARR method of appraisal?