CFA Practice Question

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CFA Practice Question

An analyst gathers the following information ($ millions) about three companies operating in the same industry:

Company | Annual Depreciation Expense | Accumulated Depreciation
1 | 10.8 | 58.9
2 | 27.8 | 80.3
3 | 33.6 | 128.8

Although the companies have different levels of sales and assets, they are all experiencing sales growth at about the same rate and use the same type of equipment in the manufacturing process. All three companies also use the same depreciation method. Which company is least likely to require major capital expenditures in the near future? Company ______

A. 1
B. 2
C. 3
Correct Answer: B

Average age of assets = accumulated depreciation/annual depreciation expense

1. 58.9/10.8 = 5.5 years
2. 80.3/27.8 = 2.9 years
3. 128.8/33.6 = 3.8years

Because Company 2 has the lowest average age of assets, it is least likely to need major capital expenditures.

User Contributed Comments 3

User Comment
davidkhang Tricky... kind of...
Inaganti6 Welcome to a CFA world
dbedford The way I see it is: The more depreciation periods they've had the more likely they are going to have to replace. So, with company 1 they've had about 6 periods of depreciation; company 3 has had about 4 and company 2 has had a little under 3 . So the answe should be B
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