Net Investment

Net investment is an important expense for trapeze artists. And for butterfly catchers. It's also a term in finance that refers to the amount a company spends on new capital investments, stuff like real estate, new factory construction, and fresh equipment purchases.

The "net" part means it leaves out any spending that goes to replace old stuff that's gotten run down.

Let’s say you own a factory that makes meat-flavored soda. Amazingly, you had a big hit with your Diet Pastrami flavor last year. It left you with some money to spend. The property next door to your factory contains an old pet cemetery. You want to build an extension to your facility to ramp up production of your new Lemon/Lime/Bacon flavor.

First step, buy the pet cemetery from the spooky guy in overalls who owns it. That costs $1 million.

Second, you have to relocate all the Rovers and Cocos and Mr. Peabodies currently interred there. Another million. Time to build the new plant. $8 million there. Plus the machines and other equipment. Another $2 million.

Separately, you need to replace some run-down equipment at the original plant. Your salami extractor is on its last legs, and one of your venison carbonators broke down. Those are going to cost a further $3 million to replace.

So, all told, you spent $15 million in investment in capital assets. That’s your gross investment figure. But $3 million of that 15 mil was to replace old stuff that had worn down. You had already accounted for it on a regular basis through depreciation. So back that $3 million out.

Which leaves you $12 million in net investment.

Net investment represents the amount your company spends on brand new investment, both fixed investment on physical capital and inventory investment. To calculate the figure, take gross investment, or the spending on everything. In this case, $15 million.

Then subtract replacement investment, the amount spent to replace capital goods that have depreciated. That's $3 million in your case, i.e., the salami extractor and the venison carbonator. Once you pull out that replacement spending, you’re left with the $12 million net investment figure.

It also leaves you with a factory that relies on meat processing built on an old pet cemetery. For next year, you might want to ask your accountants if an exorcist counts as a capital investment...