Quiz 7: Finance, Saving, and Investment

Business

Gross investment is the total amount spent in the purchase of new capital in any given financial year. Depreciation is the fall in the value of an asset during a financial year which, then, decreases the quantity of capital. Net investment is the total change in the investment compared from its value in the beginning of the year and in the end. For the given case, gross investment is the purchase of new capital (servers) which amounts to $500,000. Depreciation is the amount of reduction in the market value of older capital (servers) which is $100,000. In this way, Net investment made during the financial year 2014 is $400,000.

Value of capital at the end of the year can be computed from the value in the beginning, by adding net investment made during the year. Net investment is the total change in the investment compared from its value in the beginning of the year and in the end. This change is captured by Gross investment and Depreciation. Depreciation is the fall in the value of an asset during a financial year which, then, decreases the quantity of capital. Gross investment is the total amount spent in the purchase of new capital in any given financial year. For the given case, Investment in the beginning was $400,000. Gross investment is the purchase of new capital (servers) which amounts to $500,000. Depreciation is the amount of reduction in the market value of older capital (servers) which is $100,000. In this way, Net investment made during the financial year 2014 is $400,000. Hence, capital in end becomes $800,000.

a) Lori's saving made in the year 2014 can be calculated by taking the difference between the total disposable income and the consumption expenditure. But, first calculate Lori's total disposable income. The disposable income is the income left after paying the tax and the amount earned as interest on the savings. So, Lori's total disposable income is $20,000+$300 which makes the total disposable income as $20,300. It is given that Lori has made a consumption expenditure of $15,300. Thus, the total savings made in year 2014 is the difference between total disposable income ($20,300) and the consumption expenditure ($15,300). Thus, the total money saved in year 2014 is $5000 [$20,300-$15,300 = $5,000]. b) Lori's wealth at the end of the year 2014 is equal to the wealth in the beginning of the year 2014 and the savings made in the year 2014. In the beginning of the year 2014, Lori owned $1,000 worth of books, DVDs and golf clubs and savings of $5000. So, Lori's total wealth at the beginning of year 2014 is $6,000 [$1,000+$5,000]. The total money saved during 2014 is equal to $5,000 (calculation shown in part (a) of the solution). Lori's wealth at the end of the year 2014 is equal to the summation of the total wealth possessed in the beginning of the year 2014 and the savings made during the year 2014. Thus, the total wealth at the end of 2014 is $11,000 [$6,000+$5,000 = $11,000].

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