Suppose ZZZ Corporation issues new common stock worth $25 million in 2020.It uses $18 million of the proceeds to replace obsolete equipment in its factory and $7 million to repay bank loans.As a result, there is an increase in gross investment by:
A)$7 million.
B)$25 million.
C)$18 million.
D)$11 million.

Question

Quizplus · Accepted Answer

Gross investment refers to the total amount of money spent on newly produced capital goods or the replacement of obsolete capital goods. In this scenario, ZZZ Corporation only used $18 million of the $25 million to replace obsolete equipment, and this amount qualifies as gross investment. Therefore, the increase in gross investment is $18 million. The $7 million used to repay loans is not considered a part of gross investment as it does not involve the purchase of new or replacement capital goods.

Suppose ZZZ Corporation Issues New Common Stock Worth $25 Million