Estimate Life

I have a question below that was asked of me.  Can someone help me understand why they would think we need to buy this many machines ?

The average age of most of the equipment is well over 7 years? And assuming we have ~40 machines total, wouldn’t that mean we would have to buy over 5 machines / year on average in order to replenish?

  • Hi, Julie,

    According to textbook theory, a company buys a machine to produce revenue.  We in accounting try to match the cost of that machine against the revenue it will produce over its life.  At the end of its life, that piece of equipment is consumed.  In other words, it has reached obsolescence at which point you will dispose of it and buy a new one to replace it.  At least, that’s theory.  Its application in real life might be a little different.

    For example, I can remember working with a client in North Carolina several years ago who told me, “Bob, we have a lot of sewing machines in our company.  And they were fully depreciated years ago.  Yet, we are still using them today.” 

    And her experience may be a little closer to reality for many of us in the workplace.  In fact, this may very well describe your situation.  You may be questioning upper management’s decision to add new machines when the assets currently on site appear to be meeting your production requirements.

    CapEx budgets, approved by upper management, are driven by planning models based on assumptions of growth.  The paradigm you referenced of acquiring 5 new machines per year may or may not prove adequate to meet future targets.  However, I hope you are in a position to offer your input into the process of managerial decision-making at your company.