n Management Dynamics : Journal of the Southern African Institute for Management Scientists - An assessment of the accuracy of financial researchers' estimates of the replacement value of a firm's non-current assets

Volume 19, Issue 4
  • ISSN : 1019-567X



In financial accounting and financial economics it is important to determine the replacement values of a firm's assets. These values are essential for the application of inflation accounting, the calculation of Tobin's q ratio, and for determining a firm's free cash flow. It proves to be a challenge to the external financial researcher, however, to accurately calculate the replacement values of a firm's non-current assets, owing to the considerable effects that inflation, the economic lifetime of non-current assets, and procurement strategies have on replacement values. Replacement values can be calculated by means of either very short or longer methods. A relatively short method (widely used by South African financial researchers) is based on the calculation of a single average age for all the non-current assets of a firm. This study has found that the single average age only yielded correct results during periods of no or constant low inflation over relatively short periods of time, and where assets are procured and replaced at a constant rate. For an external financial analyst, a more accurate option is to use the capital expenditure layering method.

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