U.S. manufacturing equipment is getting
older, on average. The average age of industrial equipment in the U.S. has
risen above 10 years- the highest since 1938 (Morgan Stanley). If fact, the
growth rate of all types of capital spending has slowed. The growth rate was 3%
last year- compared with a long-term average of 8%. So, what’s the impact of
the spending slowdown on business?
The impact is discussed in a 9/3/14
article in the Wall Street Journal
article: “U.S. Manufacturing Rolls on Aged Wheels”. Here’s a link:
One reason for the slowdown is business
uncertainty. That uncertainty relates to possible interest rate increases, the
slow growth U.S. economy and tax policy. Some firms are investing more assets in
Asia and Latin America- areas that may provide more growth.
If a firm wants to remain in business and
sell a quality product, they- eventually- need to replace assets. In many
cases, the annual maintenance cost of the equipment becomes more expensive than
annual cost of financing new equipment.
Imagine that you were considering buying
Bob’s Pizza Shop. What you’re really buying is the Shop’s net assets, or assets
– liabilities. The fixed assets (equipment and machinery) are valued at original
cost less accumulated depreciation. Accumulated depreciation is the sum total
of all depreciation taken for the asset since it was purchased.
Say you look at the Pizza Shop’s balance
sheet. You noticed that a $30,000 oven has $28,000 in accumulated deprecation.
If you buy the Pizza Shop, you’ll need to replace that oven soon. As a result,
you reduce the price you’re willing to pay for the business After all, you’ll
need cash to buy the replacement oven.
To spur economic growth, the federal
government will sometimes allow bonus depreciation. This allows buyer to
depreciation much of the asset’s value in the first few years. The depreciation
generates more expense and less taxable income. Bonus depreciation encourages
businesses to purchase fixed assets- which may increase economic activity.
There are several methods of depreciation
that are widely used. Straight line depreciation expenses the same amount of
depreciation each year. Accelerated depreciation methods, such as double declining
balance, depreciate more dollars in the early years and less in later years.
Regardless of which depreciation method
you choose, you can’t depreciate more than the depreciable base of the asset.
Depreciable base is the asset’s cost less salvage value. Salvage value is the
amount you can sell the asset for at the end of its useful life. If you buy a
$30,000 truck with a $5,000 salvage value, the depreciable base is $25,000
($30,000 less $5,000).
Check out my podcast on this subject:
For blog and article writing, tutoring and
speaking on investments and finance, contact me here:
Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting
All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies (2015)
(amazon author page)
amazon.com/author/kenboyd
(cell) (314) 913-6529
(email) ken@stltest.net
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