Tutor profile: Roman L.
Briefly describe how likely is the US to hit a major recession in the coming years?
The economic situation in the USA based on the economic indicators seems relatively stable as well. US GDP has grown in the past quarters and is projected to grow in the last quarter of 2019 by 2% as well in 2019 by 1.9%. The inflation rate in the US has been under 2%, which means that GDP growth has outgrown inflation and that the economy is doing all right. There are some things that cause concern as well, for example, since March the yield curve on long-term US treasury bonds compared to short-term bonds was inverted, which can be interpreted as an indicator of a potential future recession. Bonds that mature in 1 and 2 months have had higher interests than bonds that would mature in 1 year until the middle of October 2019. It is inverted since the middle of December as well.This can be seen as an example of an impending recession, according to the Economist in 2019, because it shows the long term expectations of the investors in the US economy compared to short term expectations. Typically, short term securities have lower yield than long term securities, however we could see the situation was different in the US Treasury bonds market in 2019, which some claim is an indicator of a recession. The political situation in the US is not stable, which might have detrimental effects to the economy if not properly managed according to Harvard Political Review. The US-China trade war also have many economists worried as these trade restrictions only slow down economic growth in both countries and as a result can lead to losses in production, hence a potential recession. The FED has also been decreasing interest rates in 2019, conducting expansionary monetary policy, so it is possible that the recession is happening but being managed so far. The possibility of a future recession or financial crisis in the US exists and there are some long term issues that need to be solved as soon as possible in order to manage the upcoming recession. Do you have questions about the economic indicators used in the explanation?
What asset depreciation method should a company use and what does it depend on?
There are three main depreciation methods used by the companies: straight line method, accelerated depreciation/double declining method and units of production method. Asset depreciation method is usually set by a company based on the projected revenue that will be generated from the asset. The company would choose a method that suits them best based on the expected income to be earned from the usage of the asset, as a result if the asset will produce 10 000$ every year for ten years and most company's assets follow a similar pattern, it makes sense to use straight line depreciation method which spreads the cost of the asset evenly throughout its useful life. It is important to note, that straight line method is the easiest and is most commonly used for convenience. However, if the asset is expected to produce higher return in the beginning of its use and slow down by the end, it would make sense to use an accelerated method of depreciation, which is usually double declining depreciation. This method writes off a bigger portion of the cost in the first years and a smaller portion in the later years. This method is used when for example a long term asset will produce 20 000$/year return in 1-3 year, 10 000$/year in 4-7 year and 5 000$/year in 8-10 year. As a result, it makes sense to have higher depreciation expenses in the first three years but then the depreciation expenses should be lowered as the revenue is lower too. The last depreciation method are going to look at today is units of production method, which depreciates the assets based on how much it is used. This is a good way for a company to calculate depreciation if such company utilizes long term assets whose lifespan can be better calculated based on the units they produce rather than years they operate. An example of such asset would be a machine that is expected to produce 1 000 000 units before it is disposed. Such method is commonly used in the industrial sector where machines would wear out the more they produce, however it requires more effort and information to calculate the depreciation this way. You've been introduced to the three most common depreciation methods and to the methodology of choosing the most appropriate on for your company. We can practice with the calculations with each of the methods if you would like to see how depreciation expense is actually calculated. Otherwise, let me know if you have any questions.
Would it be wise to sacrifice profitability in the short term if the company is projecting to generate profits in the long term?
The answer depends on company's possibilities and the exact projections. There are many ways when a company is trying to scale up and as a result has to sacrifice the profits and often "burn cash" without breaking even for a long time until it reaches the level when it can generate real profits with the existing customer base. An example of such business would be social media companies that need to scale before being able to make money. Another good example could be fin tech companies as Revolut, that need to offer various incentives in order to attain customers and will be spending a lot just to get the customers to use their platform, however once they have the sufficient number of these regular customers, they can start generating solid revenue streams with good profitability margins. The company needs to clearly see their long term strategy and have confidence in their revenue streams once they scale, otherwise it would not be wise to burn cash and sooner or later the company will go bankrupt. On the other hand, if everything is well planned, it might be a great way to grow as some businesses have to spend a lot of money and time to scale and be able to generate the revenue needed to break-even and generate profit. Let me know if it is clear of you would like me to give you other examples to understand it better. Do you have any other questions.
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