The Very Costs of Tangible Fixed Assets - Economic Life Cycles & Standard Unit Costs

Abstract

Standard prices of the working-units of tangible fixed assets are, amongst other quantities, required input data in order to establish minimum product prices. However, this important data is not calculated exactly, but - if calculated in conformity with the best textbooks in use world-wide - is consistently too low, as is demonstrated in this paper.

Many textbooks talk, just talk, about the optimal useful life of tangible fixed assets. Only a few writers are trying seriously to calculate so-called economic life cycles and simultaneously standard prices of the working-units, finally ending up in minimum product prices. The theory of Terborgh and the method of maximizing the present value of expected profits are already for years, quite rightly, objects of criticism. Up until now however, the method of minimizing costs related to the working-units, is seemingly indisputable. This is obviously a sound method, which is presented in various textbooks, notwithstanding the fact that in practice one often estimates, rather than calculates, economic life cycles and indeed estimates the standard prices of the working-units as well. On second thoughts true enough, because the textbook algorithm turns out to be inadequate.

An indispensable tax addition that completes the algorithm, enabling calculation of the economic life cycle exactly, is outlined in this paper. Integral calculation schemes - assessing strategic investments from start to finish - are at anyone's disposal and easy to execute, not just in big organisations with impressive staffing but also in small and medium-sized undertakings. Anyone can learn to put these schemes to one's good use. All can be understood easily.

Keywords: DCF, Discounted Cash Flow, NPV, Net Present Value, Tangible Fixed Assets, Standard Price 1 Machine Hour, Standard Unit Cost, Minimum Product Prices, Economic Life Cycles, Theory of Terborgh, Assessing Strategic Investments