What is Net Investment? Everything You Need to Know About It.

Posted on February 21, 2018 | By Patricia Eldridge Mombo Smart Investment

What is Net Investment?

Want to understand and gain knowledge about net investments? We at Mombo SACCO are here to explain it easily.

It is the measure of how much a company has invested in capital goods such as property, industries, equipment etc. Net investment will give you knowledge about the expenditure of the company on capital goods used for active work.

Try subtracting depreciation or the capital expenditure from the amount. You’ll get a more precise idea of the investment’s real value. The sustenance, maintenance, repair or installations of the goods are also included in the cost of capital goods.

At Mombo SACCO, we’re going to briefly explain everything you need to know about net investment.


Difference between Net Investment and Gross Investment

Confused about the difference between gross and net investment? Can’t figure out the difference? Well, let us give you a little more understandable difference.

The total investment which is spent on new capital goods is known as Gross investment whereas net investment is itself gross investment but it is altered for capital depreciation.

Depreciation is a method of moving the cost of a substantial good over its working lifespan. In other aspects, it is the decrease in the value of goods.

Gross and Net investment are concurrent

We have already given a difference but they are also concurrent to one another. Notice closely! If the gross investment is constantly higher than depreciation, net investment is positive. Verily, if the gross investment is constantly lower than depreciation, net investment is negative. The positive side indicates that productive capacity is rising. On the other hand, the negative side indicates the downfall of productive capacity. This is a possible problem and is true for all organizations, small or large.

Net investment in economic growth of a country

Let us provide the formula first for you to understand easily.

The formula for net investment is (capital expenditure depreciation = Net Investment).

When the net investment is greater than 0, it indicates an increase in capital goods in the country. Increasing the production capacity and shifting the PPC (Production Possibility Curve) upwards. As a result of an increase in GDP.

But to inform you, this is also the opposite if the net investment is lower than 0. Declining the PPC and GDP.

But, then again when the net investment is equal to 0, what do you think happens? The amount of capital goods remains the same. The production capacity and GDP does not change and the PPC does not shift.

Net Investment income tax

Tax is something you can never escape from. So here, we are going to talk about net investment income tax. Let us explain with an example, you have an income from investments. You are or may be subject to net investment income tax. Simple!

Generally, it includes, but not restricted to: interest, non-qualified profits, dividends, capital gains etc. No need to be worried because it does not include wages, alimony, unemployment compensation, social security benefits etc.

Net Investment Calculation

You must be very keen by now to know how to calculate it. Let’s start then!

Earlier, we have given you the formula and now we are going to apply it. A simple example will make it easy for you. Suppose you own a company which spends KES 20 million on a brand-new equipment. It has an anticipated life of 30 years and a residual value of KES 2,000,000. Let’s take the straight-line method of depreciation. Then the annual depreciation would be KES 600,000 (i.e. {KES 20,000,000- KES 2,000,000}/30). Quite simple, right?

Now, applying the net investment formula, we are going to get KES 19,400,000(KES 200,000,000- KES 600,000) as the amount of net investment at the end of the first year of that equipment.

There is no fixed amount for proper investment in any company as some need more than the others because of capital decline every time. The net investment totally depends on the amount necessary for a company in a sector to operate. All sectors are quite different from one another and the net investments cannot be compared. But it is applicable when the companies are working in the same sector.

We at Mombo SACCO have tried our best to easily explain to you about all you need to know about net investments and we can assure you, this knowledge will help you in the long term.