Lohmann Company

Where are the funds for depreciation and what can a company do? The financial resources needed for normal operation, a company can be fed either from the outside or it can be used for sources within the company. This distinction of the capital origin applies both equity and debt capital. Amortization of financing is to be considered an equity financing from the inside. Companies write their resources they need over a period of time to the production. over the respective useful life off. The company takes into account the value loss arising during the use period and charged these costs with the product calculation. The revenues obtained in the market, should therefore cover the costs resulting from the depreciation of machinery and equipment.

Considering, for example, a machine that is depreciated linearly over four years, 25% of the original expenditure for the machine to be every year Product price charged. After four years returned for the machine has been capital back again in the company, even if corporate earnings were during this time at zero (under the condition that all products could be discontinued). As the depreciation in the price of the product was a calculated, also capital write-downs flows in the company through the sales process. In the example of the four-year depreciation, cash and cash equivalents in the amount of 25% of the purchase price are accrued to the company in the first year. This amount is required but three years later, when the machine is fully written-off and must be replaced. The company can dispose over this 25 percent now for three years.

The free capital can be used, for example, to invest in parts of the capital. It can also longer-term investments to be financed, as long as ensures is that the investment period is longer than the amortization period. At companies with This financing effect can be used to expand capacity a larger machine park. The depreciation amounts for several identical machines can be used to create an additional machine for this machinery. This increases the current capacity, without having to provide new funds for it. This effect is known as the Lohmann-Ruchti effect”. The capital, accumulated depreciation for a new acquisition, can be used more efficiently in this way than to wait only on the current account on the appropriate use.