FSA - average age technology, equipment, following, advantage

Elliotbay

In industries where there are rapid changes in technology related to production processes, which of the following characteristics will most likely indicate that a firm has a competitive advantage?

A) Low capital expenditures.

B) Low average age of equipment.

C) High earnings per share.


Your answer: C was incorrect. The correct answer was B) Low average age of equipment.

What does average age mean, the schweser gives a formula and one sentence, but it doesn't really explain. If the average age of an asset is 2 and the other company's average age is 6, does it mean that the asset with 2 years is BETTER or worse? Does it mean average age of equipment? so newer better??

Londonrocks

The key here is "rapid changes in technology." If the firm has low average age of equipment then their equipment will be newest and best leading to a competitive advantage.

chetan86

OK, so low average age is better... than high average age, but only because this is ' rapid technology?

sdada

Low average age means newer equipment. Take for example: server speed increases 50% every year which cuts down on costs, if company A has servers which have an average age of 2.1 years and company B has servers that have an average age of 5.3 years, then company A has a significant advantage due to the much newer equipment and server speed.

Does that make sense?

evolsteevol

Average Age to be good or bad would depend on the context.

In this case, 'Low' average age is good, because it indicates latest equipments, in a 'rapidly changing technology' environment.

'High' Average Age could be good, in the context of ROA measure. High Age there would mean low net value of your assets to increase your ROA.

Also, High Average age would indicate that PPE is old and a big Capital Expenditure is due.

johnnyBuz

Completely opposite scenario ...

high average age would be good in a industry where you are going to have a change in technology.. if you have new machines, book value(historical cost - depreciation) would be high related to older machines. And since there is a change in technology the fair value of these machines would be too low and you would have to sell the new machines at a considerable loss if you have to stay in competition.

Does this makes sense?

cchang

Average age of equipment is found by taking:

(Accumulated Depreciation)/(Depreciation Expenses).

Hence with low average age will mean lower accumulated depreciation assuming the depreciation expenses is equal across all firms. Thus, it will make sense that the firm will be more competitive.