An analysis of a firm's financial statements indicates that the average age of its assets is declining. This could be due to which of the following?
I. The firm is acquiring new assets with longer depreciable lives.
II. The firm's capital expenditures are outpacing depreciation.
III. The firm is not using its assets as intensively as it should.
IV. The firm is operating in its maturity phase.
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A. B. C. D.B
Note that the firm is likely not in a maturity or declining phase but in a growth phase, which is characterized by increasing capital investments.
The declining average age of a firm's assets can be attributed to several factors. Let's analyze each option and its implications:
I. The firm is acquiring new assets with longer depreciable lives. If the firm is acquiring new assets with longer depreciable lives, it means that the newly purchased assets will contribute to the overall asset pool, but they will take longer to depreciate fully. As a result, the average age of the assets will decline.
II. The firm's capital expenditures are outpacing depreciation. When a firm's capital expenditures (money spent on acquiring or improving assets) exceed the amount of depreciation (the allocation of the asset's cost over its useful life), it leads to an increase in the asset base. As newer assets are added, the average age of the assets decreases.
III. The firm is not using its assets as intensively as it should. If a firm is not utilizing its assets as intensively as it should, it implies that the assets are not being fully utilized to generate revenue. In this case, the average age of the assets would not necessarily decline. Instead, it may remain constant or even increase over time.
IV. The firm is operating in its maturity phase. Operating in the maturity phase typically implies that a firm has already reached a stable level of growth and has established a substantial asset base. In this phase, the firm's capital expenditures might slow down, and the focus may shift towards maintaining and optimizing existing assets. This could lead to a decline in the average age of the assets.
Based on the above analysis, options I and IV can both contribute to a declining average age of a firm's assets. Therefore, the correct answer is option A: I & IV.