Gross investment is the total investment in an asset without considering depreciation, and is used to calculate ROI. If the initial investment is unknown, the current value and depreciation can be added. Tangible and intangible assets are included. ROI is measured against gross investment, not current value, to avoid skewed results.
Calculating gross investment is a way of factoring a company’s investment in an asset, and is commonly the total investment without taking into account depreciation on the asset. If the business does not remember how much it spent on the asset, then one way to calculate the gross investment is to add the current value and depreciation of the asset. This figure is used for almost anything a company invests in, such as equipment, property, or land. Return on investment (ROI) is a number that determines whether the investment was successful, and gross investment is commonly used in this calculation.
As a business asset ages or gets more use, it depreciates or declines in value. For example, a piece of equipment that was purchased for $50,000 United States Dollars (USD) may be worth only $45,000 USD next year. To ensure that the company knows the current value of its assets, each asset is valued quarterly or annually. Gross investment, or total investment, is the amount of money the business initially used to purchase the asset. In this case, it would be $50,000 USD.
While gross investment is generally the original investment in the asset, a company can forget what it originally invested. If this occurs, a formula involving the asset’s current value and full depreciation from its original value can be used to make the calculation. For example, if the land is worth $100,000 USD and has depreciated by $20,000 USD, the two are added together and the total investment is $120,000 USD. An asset can also increase in value, such as land and property values increasing; in this case, the amount of increased value would be subtracted from the current value.
Gross investment is used to express the total investment of almost all business assets. The most common assets are tangible, such as land, equipment, property, and inventory. Intangible assets such as trademarks and patents may also be included.
ROI measures the amount of money a business earned from its investment, and this is commonly measured against gross investment. If a company generates $5,000 USD from an investment of $4,000 USD, its ROI is $1,000 USD. The current value of the asset can be used, but this can lead to skewed results. For example, if the current value of an asset is $4,000 but the total investment is $7,000 and the business made $5,000, it would appear to be a gain, but this would actually be a loss of $2,000.
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