Old Baseball Players, Russell Wilson, and Depreciation Expense
I’m a St. Louis native- a town that’s obsessed with Cardinal baseball.
And why not?
From Wikipedia: “The Cardinals have won 11 World Series championships, the most of any NL team and second in MLB only to the New York Yankees. The team has won 19 National League pennants, third-most of any team behind the Yankees and Los Angeles Dodgers.”
The team drew 3.24 million fans in 2023, which was 4th in the major leagues.
How has St. Louis performed well over such a long period?
This post explains the benefits of signing older baseball players, depreciation expense methods, and the critical decision to replace assets.
Signing Older Players
Over the years, the Cardinals have benefited from signing older players, and getting great performance out of those players- even on a part time basis.
Why?
Experience really counts in baseball.
Veterans know about the pitches they face, and they’re seen thousands of plays that they can learn from.
Do you swing at the 3-0 pitch, or take it?
Depends on the pitcher, the score, and who’s on base (if anyone).
Here’s a veteran player who helped the Cardinals win a World Series.
Lance Berkman
Berkman was 35 when he signed with the Cardinals. Again, from Wikipedia:
“2011 became a comeback year for Berkman, as he was one of the team leaders in batting average, home runs and RBI. He was named the NL Comeback Player of the Year. Berkman would also finish 7th in NL MVP voting, the sixth and final time he would finish inside the top ten in MVP voting.”
Berkman won his first World Series championship as the Cardinals defeated the Texas Rangers in 7 games.
The Cardinals have signed two older players for the 2024 season.
New Crop of Older Players
According to the current Cardinal roster:
Lance Lynn (36 yrs old): Pitcher, 1 year, $11 million. Played for the Cardinals a few years ago.
Brandon Crawford (37 years old): Infielder, 1 year, $2 million
But here’s the key.
When are old athletes no longer productive?
Just ask quarterback Russell Wilson.
The Denver Broncos released Russell Wilson, who they signed to a massive contract. The Broncos will have to pay Wilson $35.4 million this year and $49.6 million next year.
Ouch.
Which brings us to fixed assets.
So, What’s an Asset, Exactly?
We accountants define an asset as a resource used to generate revenue.
Let’s say you’re a plumber, and you buy a $30,000 truck and $10,000 in equipment to provide plumbing services.
Ask yourself two questions:
1. How long can I use the truck and the equipment?
2. How much revenue can I produce with the truck and equipment before they’re no longer useful?
The rate at which you use an asset determines the depreciation expense. This concept matches the annual expense of owning the truck with the revenue produced by using the truck.
Using the Asset to Make Money: Depreciation Expense
Let’s first assume that you expect to use the $30,000 truck and drive the same number of miles each year. You’ve been in business for 15 years, and you know how many jobs you’ll complete and about how many miles you’ll drive each year.
Straight-line method of depreciation
Since every year is about the same, you use the straight-line method of depreciation. Assuming an 8-year useful life for the truck and no salvage value after 8 years, your annual depreciation is:
$30,000 truck cost / 8 year useful life = $3,750 each year.
Accelerated depreciation methods
OK- change the example.
Assume that you plan on working a ton of hours in the first few years, and then slow down in later years- maybe you’re near retirement age. You’ll produce more revenue in the early years driving more miles, so you choose an accelerated method of depreciation.
There are several to choose from, including the double-declining balance method (DDB).
It works like this:
When you use the straight-line method for an asset with an 8-year life, you’re depreciating at 12.5% a year. The DDB method doubles that percentage to 25%, and that’s the year one depreciation amount:
$30,000 X 25% = $7,500 year one depreciation expense
I won’t calculate the later years, but annual depreciation will decrease over time.
Here’s the key point.
The total depreciation expense over the life of the asset is the same- regardless of the depreciation method you choose.
If you post $7,500 in depreciation expense in year one (rather than $3,750), you post much less in later years. But, the truck’s total depreciation will be $30,000 using any method.
Replacing Assets
Now, for the tough part- when do you dispose of an asset?
Many companies continue to use assets that are fully depreciated. They’re old, but they just keep producing (like some older athletes).
If the annual expense to maintain the old asset isn’t excessive, it might make financial sense to keep using an old asset- and not replace it.
Food for thought.