There’s outrage today over a story that NYC needs to spend $27.5 million to replace street signs because they are uppercase and federal regulations require title case. They will also now be using the font ClearviewHwy rather than what I believe is Highway Gothic (I’m no font geek).
However the headline is misleading if you read the actual article. A little common sense and a trivial knowledge of accounting (you most likely learned this in High School) will make you scratch your head.
The article even says typical sign lasts about a 10 years. They have until 2018 to make the change, which is 8 years. Assuming an even distribution that would mean 80% of the signs would have been replaced by 2018 anyway due to their age. The remaining 20% would be nearing their replacement time anyway. 20% of $27.5 million is $5.5 million. That’s the cost of the signs that will be replaced prematurely.
Even that however is not correct since the city would almost definitely use straight-line depreciation on the cost of the signage. The reasoning for this is as follows: If you have the sign for 8 of the 10 year lifespan, you got 80% of the value. Each year is worth 10% of the value.
The formula goes something like this:
annual depreciation expense = (cost of fixed asset - residual value) / useful life in years of asset
Again we’ll assume an even distribution of the remaining 20% (that’s 10% replacement per year or about $2.75 million). We’ll also assume no residual value though they are likely sold for scrap metal and have some token value.
($2.75M-0)/10 = $275,000
Now 10% of the signs are being replaced 2 years early, another 10% are being replaced 1 year early. That’s 3 years of value lost. That means:
$275,000 x 3 = $825,000
The actual cost to the city is $825,000 in lost value due to prematurely replacing signage. Not $27.5 million. I guess you can throw in a little more for labor, though I doubt you’ll get $26M and change out of that.