The Tyranny of Average Cost - part the seventeenth

You many have seen that Samsung is going all in in Texas, to the tune of $17 billion. Yet another example of betting on full production.

Samsung's investment is expected to create more than 2,000 high-tech jobs

Texas's average manufacturing wage is $14.48, add in $10 for bennies and round up to $25.

So, what's the vig on the capital? We'll go with 10 year straight-line depreciation. Keeping in mind that crafty capitalists often front load with accelerated depreciation, using all manner of IRS (one hopes) approved methods. We need only one additional number: residual value. Let's guess just a billion; the machinery will be long past obsolete (whether the nodes installed will ever become 'legacy' for micro-controllers and the like as has happened in the past, is an open question; much of those larger nodes have not been replaced by more recent smaller nodes), and the building may, or may not, have much value as a real estate asset.

Therefore: 16 billion / 10 = $1.6 billion/year capital cost. Labor cost/year (8*50*25*2,000): $20 million.

What then can we expect Samsung to do if demand falls? Not much from a cost avoidance perspective; labor is a drop in the bucket. Materials, likely so too.

SOL.