How is the Average Investment typically calculated?

How is the Average Investment typically calculated?

• A. (Initial Outlay - Scrap Value)/2
• B. (Initial Outlay + Scrap Value)/2
• C. (Initial Outlay + Depreciation)/2
• D. (Initial Outlay - Depreciation)/2

Answer: (B)

The Average Investment is typically calculated by taking the sum of the initial outlay and the expected scrap value at the end of the project's life and dividing by two. This formula reflects the average value of the investment over its useful life, accommodating the fact that the investment begins at its full initial cost and gradually decreases to its salvage or scrap value. This approach provides a reasonable approximation for average investment in situations where the investment is expected to depreciate evenly over time. The calculation captures both the initial expense of the asset and the expected cash inflow (or value) at the end of its useful life. The other methods presented involve either subtracting values (like depreciation or scrap value) or including depreciation in a way that does not align with the standard calculation of average investment. These alternatives do not appropriately reflect the typical usage of initial and ending values regarding investments.

The Average Investment is typically calculated by taking the sum of the initial outlay and the expected scrap value at the end of the project's life and dividing by two. This formula reflects the average value of the investment over its useful life, accommodating the fact that the investment begins at its full initial cost and gradually decreases to its salvage or scrap value.

This approach provides a reasonable approximation for average investment in situations where the investment is expected to depreciate evenly over time. The calculation captures both the initial expense of the asset and the expected cash inflow (or value) at the end of its useful life.

The other methods presented involve either subtracting values (like depreciation or scrap value) or including depreciation in a way that does not align with the standard calculation of average investment. These alternatives do not appropriately reflect the typical usage of initial and ending values regarding investments.