The definition of the Lohmann-Ruchti effect
The Lohmann-Ruchti effect is a so-called capacity expansion effect. This means, for example, the expansion on certain production machines. These are then repurchased and reinvested from the financial resources obtained by the depreciation. The Lohmann-Ruchti effect is therefore an effect of depreciation. It can be determined with a certain formula, the so-called capacity expansion factor. The difference to the Lohmann-Ruchti effect is, above all, that if the released capital, which was created by the depreciation, is not used, one speaks of a capital release.
The expansion of operational capacity
The capacity can be expanded by the release of capital from consumption-related depreciation. This is due to the fact that the companies include the depreciation for the use of the plants in the selling price of the manufactured products. In the vast majority of cases, depreciation is paid at a price earlier than the company would have to buy a new one due to the wear and tear of a machine. For this reason, the company has previously released capital for reinvestment.
The situation can be explained in more detail using this example. A company invests in 2 large dough stirrers at the price of 12.000 EUR. The company writes the stirrers on 3 years linearly with 4.000 EUR / anno. In the first and second year (2 years) x (2 instruments) x (4000 EUR depreciation) = 16.000 EUR are refinanced by reinvesting the returns from the depreciation. This calculation shows that an agitator can already be purchased in the second year In the long run the agitators can be expanded to the number of three, which stabilizes after the fourth year.
Capacity expansion and its challenges
The Lohmann-Ruchti effect can only arise under very specific conditions, since this is a theoretical effect. If the company seeks to expand its operational capacity, the following prerequisites are mandatory.
1. There must be a complete financing of the initial equipment.
2. The duration of depreciation must correspond to the use.
3. The claims must be liquidated and must be available for liquid purposes.
4. The replacement values of the equipment and systems must also remain constant.
5. Reinvestments will take place at the end of the year.
6. Demand in the market must continue to be high, so that the new machines and systems can also be put to good use.
7. The financing of inventories or current assets is adequately hedged.
8. The consideration of interest effects does not take place.
How is the capacity expansion effect calculated?
If all prerequisites are fulfilled, the capacity expansion effect can be calculated with a certain formula. This formula depends on the useful life in years n and is: Capacity expansion effect (KF) = 2 * n / (n + 1).
Here is a specific example which explains the formula. The useful life is 4 years. If you then enter the usage term in the formula, the following result is obtained. KF = 2 4 * / (4 1 +) = 1,6. That is, in the long run the 1,6 fold capacity can be achieved compared to the initial state. It can therefore be extended to 2 systems on 3 systems in the long term.
The conclusion and summary of the Lohmann-Ruchti effect
The Lohmann-Ruchti effect can ultimately guarantee an expansion of the company's capacities. Depreciation and amortization is used as reinvestment and can thus be used. Nevertheless, the prerequisites must be met to apply the Lohmann-Ruchti effect. Otherwise, capacity expansion can not be achieved. Nevertheless, the Lohmann-Ruchti effect is a good way to procure and reinvest money.