5.2. Calculating Average Annual Investment

Try these first

1. 1.

   What does investment cost represent?

   Hint

   Think about what it costs to use a machine each year.

2. 2.

   Name one factor that affects depreciation.

   Hint

   Consider how long you've had an item.

3. 3.

   What is the average annual investment method used for?

   • An accurate cash flow estimate
   • An approximate way to calculate investment costs
   • A method to determine equipment rental rates

   Hint

   Consider what 'average' implies in financial calculations.

4. 4.

   True or False: Depreciation increases the value of equipment over time.

   • True
   • False

   Hint

   Think about how long you keep equipment and what happens to its value.

5. 5.

   A piece of equipment is purchased for $50,000 with a salvage value of$5,000 and is expected to last 15 years. Calculate the average annual investment.

   Hint

   Use the provided formula to find the AAI.

6. 6.

   If the ownership costs of a machine including insurance, taxes, and depreciation sum to $1,000 annually, what is the average investment per year if the average value of the machine is$20,000?

   Hint

   Calculate the annual costs as a percentage to find out average outgoings.