The Definition of the Lohmann-Ruchti Effect

The Lohmann-Ruchti effect is a so-called capacity expansion effect. This means, for example, the expansion of certain production machines. These are then purchased and reinvested from the financial resources generated by the write-downs. The Lohmann-Ruchti effect is therefore an effect of depreciation. It can be determined using a specific formula, the so-called capacity expansion factor. The main difference to the Lohmann-Ruchti effect lies in the fact that if the released capital, which was caused by the depreciation, is not used, one speaks of a capital release.

Expansion of operational capacity

Capacity can be increased by releasing capital from consumption-based depreciation. This is due to the fact that the companies include the depreciation for the use of the equipment in the sales price of the manufactured products. In the vast majority of cases, the write-offs on the price are paid earlier than the company would have to buy a new one due to the wear and tear of a machine. This is why companies have capital that has already been released earlier at their disposal for reinvestment.

This example can be used to explain the situation in more detail. A company invests in 2 large dough mixers at a price of 12,000 EUR each. The company amortizes the stirrers on a straight-line basis for 3 years with 4,000 EUR/anno each. Through the reinvestment of the returns from depreciation, the first and second year ((2 years) x (2 devices) x (4000 EUR depreciation) = 16,000 EUR are refinanced. This calculation shows that an agitator can be purchased in the second year already. In the long run, the stirrers can be extended to three pieces. Here, stabilization is taking place after the fourth year.

The capacity expansions

and your challenges

The Lohmann-Ruchti effect can only occur under very specific conditions, since this is a theoretical effect. If the company aims to expand its operational capacity, the following prerequisites are mandatory.

1. a complete financing of the initial equipment must be available.
2. the duration of the depreciation must correspond to the use.
3. the claims must be liquidated and available in liquid form.
(4) The replacement values of equipment and installations must also remain constant.
5 The reinvestments will take place at the end of the year.
6. the demand on the market must remain high so that the new machines and plants can be put to good use.
7 The financing of inventories and current assets is sufficiently secured.
8. interest rate effects shall not be taken into account.

How is the capacity expansion effect calculated?
If all conditions are met, the capacity expansion effect can be calculated using a specific formula. This formula is dependent on the useful life in years n and reads: Capacity expansion effect (KF)=2*n/(n+1).

Here is a specific example that explains the formula in more detail. The useful life is 4 years. If you then enter the useful life in the formula, the result is as follows. KF=2*4/(4+1)=1.6, which means that in the long run 1.6 times the capacity can be achieved compared to the initial state. It can therefore be extended to a duration of 3 installations for 2 installations.

Conclusion and summary of the Lohmann-Ruchti effect

The Lohmann-Ruchti effect can ultimately ensure an expansion of operational capacities. The returns from depreciation are used as reinvestment and can therefore be used. However, the The prerequisites must be fulfilled to apply the Lohmann-Ruchti effect. Otherwise no capacity expansion can be created. Nevertheless, the Lohmann-Ruchti effect is a good way to raise and reinvest money.