Average age of asset

CFA Level I
#1

Can someone explain why a firm that has lowest average age of asset (among other firms’) is least likely to need major capital expenditures in the future? I thought if the ave age of asset is low, they need to change the asset at faster rate, i.e. in the shorter time.

#2

think about the flipside of it… if a firm’s avg age of assets is high (meaning their assets are very old), they will need replacing pretty soon, i’d think…

#3

Probably you’re correct. What about the asset on the B/S after it has been fully depreciated? The cumulative depreciation will offset the book value of that asset. The net balance is 0 then. Do they need to buy a new asset or continue to use that asset with zero net balance?

#4

well it up to the company really… sure they can still use the asset, it will just stay on their books with a zero value… but if their initial figures were correct (ie. the useful life of the asset is the number of years they estimated it would be) then they most likely will get newer assets… its just like saying, theres a 5 year old, a 15yr old, a 45yr old, and an 80 yr old… which one will die first?

#5

haha… I’ll remember your illustrative example for this exam. Thanks.

#6

Sondin Wrote: ------------------------------------------------------- > Probably you’re correct. > > What about the asset on the B/S after it has been > fully depreciated? The cumulative depreciation > will offset the book value of that asset. The net > balance is 0 then. Do they need to buy a new asset > or continue to use that asset with zero net > balance? Don’t look at this stuff like its some obscure abstract concept. Try to relate this to reality and apply some common sense. For example, utos are typically depreciated over 3-5 years. if you had a six year old car would you automatically be forced to buy a new one just because it had a net book value of zero? I’m not aware of any assets depreciated over a period of more than 40 years. Would a company that has been in abuilding for more than 40 years be forced to sell it or knock it down and rebuild it just because it was more than 40 years old?

#7

Thanks Super I. I get it.