Asset Valuation Reserve - AVR

And finance allah shmoop what is ah sinking fund oh

that oil rig she's sinking we'll meet nessie lovely pink

rig who has been working nicely for eight years now

she pumps ten thousand barrels of oil from five thousand

feet underwater without complaining a lick The experts believe that

there are literally millions of barrels below where she drills

and they know that sadly nessie won't be alive long

enough to pump all of them out from you know

below the ocean well she'll live twenty years and that's

it then she'll kill over like your favorite dog one

day and die and the company knows that they'll have

to spend a billion dollars that day toe by nesi

to the to z Well with that eventual sad day

in mind mega glop corporation crown danish oyster which owns

nessie has expected the billion dollar bill to come to

them at that time And thus far each year for

eight years they have socked away money in what is

called a sinking fund and you know it took us

a while to get there too so sorry so that

twelve years from now when the billion dollar bill comes

due it's not a big shock to the company They

will already have saved their pennies Lots of them so

that the billion box will be on hand Just sitting

in their bank of america account our bank of wherever

account ready teo Wire into riggs Are us to deliver

a brand spanking new nessie too When nesic one has

you know sucked her last oil So here's the mao

A billion dollar bill is coming due in twenty years

We have tons of advanced notice and sock away money

to pay for it on a straight line basis while

we sock away fifty million bucks a year They put

it in a mattress in you know bank of america

totally ready to go When you know her time comes

in real life The company would have lots of other

options Like buying the nessie too With leverage they could

put a fraction of the total amount of purchase her

down and maybe that's a third or less in total

price Then they could borrow the remainder amount of money

and buy the rig on credit Well they could also

just lease it from the manufacturer but then leasing it

Means that someone else owns nessie too and they maintain

it There's a lot more risk in managing it and

fixing it should nessie to ever need a trip to

the shop And things can get ugly Yeah like that

Okay Option three sinking fund buy with cash on hand

Well so why would the company have struggled so much

to put away fifty million year for two decades Well

when it comes time to negotiate with vendors about buying

a rig when the buyer is loaded and ready with

ash well then it can command much better deal terms

and probably a better price right it khun goto many

ven doors of rigs and say i got cash You've

got the rig A vendor who needs to borrow money

from a bank first teo then pay another vendor And

at worst it would have to you know borrow money

from the vendor selling the rig and they charge a

super high interest rate Ever buy a car Yeah You

don't wanna have to borrow money from a car salesman

Ever Well sinking funds essentially sink the liability of an

eventual big fat harry bill that's coming D'oh Yeah different 00:03:11.968 --> [endTime] Bill what