At the start of the year, your firm's capital stock equaled $100 million, and at the end of the year it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment during the year equaled A) $1 million B) $5 million. C) $7 million D) $25 million

The answer is D.

Explanation:

Net investment equals Gross investment minus depreciation.

Net investment equals Investment at the beginning of the year minus Investment at the end of the year.

Net investment = $105 million - $100 million.

Net investment = $5million.

Depreciation = 20% of investment at the start of the year

= 20% of $100million

= $20million.

Gross investment is therefore,

$5million + $20million

=$25 million

Option D,$25 million is the correct answer.

Explanation:

The net investment formula can be used to compute gross investment by changing the subject of the formula as shown below:

Net investment = gross investment minus depreciation

Net investment =Closing capital stock minus opening capital stock

closing capital stock is $105 million

opening capital stock is $100 million

net investment=$105 million-$100 million=$5 million

Gross investment is unknown

depreciation=opening capital stock* depreciation %

depreciation=$100 million*20%

                     =$20 million

$5 million=gross investment-$20 million

gross investment =$5 million+$20 million

gross investment =$25 million

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