Thesis (MBA)--Stellenbosch University, 2009. / ENGLISH ABSTRACT: In financial accounting and economics it is important to be in a position to determine
replacement costs of assets. These costs are essential for application of inflation accounting ,
the calculation of Tobin's q ratio, as well as the calculation of the free cash flow (FCF) of a
company. However, it proves to be a daunting challenge to calculate especially accurate
replacement costs of a company's fixed assets, owing to the considerable effects that
inflation, economic lifetime of fixed assets and procurement strategies have on the
replacement cost, and consequently on the FCF of a firm .
In determining the FCF of a company, it is essential to differentiate between the goals of a
company to maintain fixed assets or to expand operations. This split is difficult to ascertain,
as few companies in South Africa publish the split. In addition to this, it is important to
distinguish between actual required replacement investment (RI) and that part of the RI that
has conveniently been postponed. As a consequence, analysis of a company's financial
statements to determine replacement costs and subsequent FCF is further complicated.
In 2001 , Hall investigated the behaviour of the average age of fixed assets as calculated with
the Cutler and Westwick (1973: 17) formula , by developing specific inflation adjustment
models. Hall's (2001: 40) study provided insight into some of the factors that might influence
the application of the Cutler and Westwick formula for the calculation of the average age of a
firm 's fixed assets. This research report developed Hall's models further, and proved that the
average age of fixed assets, as used in the determination of replacement cost of a
company's fixed assets, could only be applied in zero inflation conditions. In positive inflation
periods, the average age of fixed assets as per Cutler and Westwick's formula is
understated, resulting in lower estimations of replacement costs. Consequently, the
additional depreciation as determined for inflation accounting purposes is understated.
In this research report, the models referred to above were developed further to determine the
required maintenance (or RI) part of the investing decision relative to depreciation written off.
This enabled the modelling of FCF for companies, assuming certain model restrictions, such
as constant inflation, evenroll fixed asset replacement and similar economic lifetimes for all
fixed assets. However, this only provides some insight into the trends of additional
deprecation required for different situations, and cannot be used in practice as comparable
practical situations do not exist.
This study therefore concludes that the calculation of replacement cost for inflation
accounting purposes proves to be a very complex problem. No simple or quick model
currently exists for determining the replacement costs of fixed assets and subsequent FCF of
a firm. It is recommended that, when determining the replacement costs of fixed assets, the
detailed fixed asset register of the firm should be consulted in order to determine the unique
asset investment and replacement strategies, as well as the split of the fixed assets in terms
of different economic lifetimes. Once this information is available, unique models per
company could be developed based on the applicable inflation rates. / AFRIKAANSE OPSOMMING: In finansiële rekeningkunde en ekonomie is dit belangrik om die vervangingswaarde van
bates te kan bereken. Hierdie waardes is essensieël vir die toepassing van
inflasieboekhouding, die berekening van Tobin se q-verhouding, sowel as die berekening van
die vrye kontantvloei (VKV) van 'n maatskappy. Dit blyk egter 'n moeilike taak te wees om
veral akkurate vervangingswaardes vir 'n maatskappy se vaste bates te bereken, as gevolg
van die groet invloed wat inflasie, die ekonomiese leeftyd van die vaste bates en
aankoopstrategieë het op die vervangingswaarde, en gevolglik op die VKV van 'n maatskappy.
In die bepaling van die VKV van 'n maatskappy, is dit noodsaaklik om te onderskei tussen
die doelwitte van die maatskappy om vaste bates te onderhou of om werksaamhede uit te
brei. Hierdie onderskeid is moeilik om te bepaal, aangesien min maatskappye in Suid-Afrika dit publiseer. Ook is dit belangrik om te onderskei tussen werklik benodigde
vervangingsinvestering (VVI) en daardie gedeelte van die VVI wat gerieflikheidshalwe
uitgestel is. Die ontleding van 'n maatskappy se finansiële state ten einde
vervangingswaarde en die daaropvolgende VKV te bereken, word gevolglik verder
gekompliseer.
In 2001 het Hall die gedrag van die gemiddelde ouderdom van vaste bates ondersoek met
behulp van die Cutler en Westwick (1973: 17) formule, deur spesifieke inflasie aangepaste
modelle te ontwikkel. Hall (2001 : 40) se studie het insig gebied in sommige van die faktore
wat die toepassing van die Cutler en Westwick formule vir die berekening van die
gemiddelde ouderdom van 'n maatskappy se vaste bates kan beïnvloed. Hierdie
navorsingsverslag ontwikkel Hall se modelle verder en bewys dat die gemiddelde ouderdom
van vaste bates, soos gebruik in die beraming van die vervangingswaarde van 'n
maatskappy se vaste bates, net toegepas kan word in toestande van nul inflasie. In periodes
van positiewe inflasie word die gemiddelde ouderdom, soos bepaal deur die Cutler en
Westwick formule, te laag opgegee, met 'n gevolglike laer skatting van vervangingswaarde.
Dit lei daartoe dat die addisionele waardevermindering, soos bepaal vir
inflasieboekhoudingsdoeleindes, te laag opgegee word.
In hierdie navorsingsverslag word die modelle waarna hierbo verwys is verder ontwikkel ten
einde die vereiste instandhoudings- (of VVI-) gedeelte van die investeringsbesluit relatief tot waardevermindering te bepaal. Dit maak dit moontlik om die VKV van maatskappye te
modelleer, met sekere modelbeperkings wat veronderstel word, soos konstante inflasie,
vaste batevervanging volgens 'n harmonies opgeboude masjienpark, en soortgelyke
ekonomiese leeftye vir aile vaste bates. Dit bied egter net 'n mate van insig in die patrone
van addisionele waardevermindering wat vir verskillende situasies benodig word en kan nie
in die praktyk aangewend word nie, aangesien vergelykbare praktiese situasies nie bestaan
nie.
Hierdie studie kom dus tot die gevolgtrekking dat die berekening van vervangingskostes vir
die toepassing van inflasieboekhouding 'n baie komplekse probleem is. Geen maklike of
vinnige model bestaan tans vir die bepaling van die vervangingswaarde van vaste bates en
die gevolglike VKV van 'n maatskappy nie. Daar word aanbeveel dat, wanneer die
vervangingswaarde van vaste bates bereken word, die gedetailleerde vaste bateregister van
die maatskappy geraadpleeg moet word ten einde die unieke investering- en
vervangingstrategieë, sowel as die skeiding van die vaste bates op grand van verskillende
ekonomiese leeftye, te kan bepaal. Sodra hierdie inligting beskikbaar is, kan unieke modelle vir die maatskappy ontwikkel word op grand van die toepaslike inflasiesyfers.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:sun/oai:scholar.sun.ac.za:10019.1/18128 |
| Date | 03 1900 |
| Creators | Van Eeden, Anita |
| Contributors | Hamman, W. D., Stellenbosch University. Faculty of Economic and Management Sciences. Graduate School of Business. |
| Publisher | Stellenbosch : Stellenbosch University |
| Source Sets | South African National ETD Portal |
| Language | en_ZA |
| Detected Language | Unknown |
| Type | Thesis |
| Rights | Stellenbosch University |
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