SMT007 Magazine

SMT007-Dec2023

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16 SMT007 MAGAZINE I DECEMBER 2023 Johnson: More software in the capital equip- ment means that carrying the paper makes sense, because so much more of the revenue stream would be from the support contract. Matties: Yes, and spare parts. There is talk about the CHIPS Act as a big influence. Where do you put that in this economic equation? What should we expect from that? With respect to the CHIPS Act and other industrial policies, the U.S. hasn't historically had much industrial policy, especially when it comes to electronics. I have a lot of hope for 2024 and 2025. ere are several reasons why the economy was stronger in 2023, but it wasn't driven in large part by government policy. Government action thus far probably hasn't yet shown up in any big way. ose things will show up, but it just takes a long time. Legislation like that is never shovel-ready. Matties: Should companies factor that into their economic plans now? Yes. ey can count on some upside, some additional volume, and demand that will mate- rialize. It's hard to know the timing of that demand, so that's the risk. We should see that growth show up in con- struction, as well as some other areas, like the industrial side of the economy. e challenge is the timing, but it's definitely sitting there, and it will come. Companies will benefit across the economy. Johnson: How do our readers take all this economic information and put together an action plan for 2024? Higher interest rates mean higher discount rates. If you think about using discount rates to determine capital projects, like net pres- ent value, this environment means that future investments have much higher hurdles to be economically viable. ey must take that into account. Johnson: So, that shifts the calculation for your ROI? Yes. Let's think of net present value and the internal rate of return. e internal rate of return is the rate at which net present value is zero—you're indifferent between taking or not taking the project. When you think about investing in a project, take all the future cash flows you expect from that project, and dis- count them back to today. If those cash flows are higher than the investment today, then you would make the investment. e discount rate you use is typically the risk-free rate, which is much higher now than it was pre-pandemic, and it will stay high. e 10-year treasury, which is oen a risk-free rate used for a discount rate, is at, let's call it, a 15-year high. at means the hurdle for those investments is much higher, so the ROI must be higher. e way we do these financial cal- culations, projects will have to produce more cash flow than they had in the past. In other words, the framework in which they think about investment projects has changed; poten- tial investments must be more lucrative. Matties: All right, sir. Thank you very much. anks. SMT007

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