Net investment is a measure of how much a company spent on capital items such as property, plants and equipments. Over time, capital diminishes through depreciation and use, so a company must continually invest. There is no set rate for proper investment in a company as some require more than others.
Determine the expenditures. For example, a company pays $100,000 on a factory.
Determine the depreciation. For example, the plant has an asset life of 40 years and no residual value. Straight-line depreciation is $100,000 divided by 40 years, which equals $2,500.
The residual value is an estimate a company makes based on prior situations or researched facts on how much an asset will be worth for resale after the asset's useful life. As an example of straight-line depreciation with a residual value, if the plant had a residual value of $2,000, then the residual value is deducted from the asset cost. This changes straight-line depreciation cost to $100,000 minus $2,000, which equals $98,000. Then $98,000 divided by 40 years equals $2,450 of depreciation.
Subtract the depreciation from the expenditures. In our example, $100,000 minus $2,500 equals a net investment of $97,500.
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