It says that The straight-line method results in an increasing return on investment over time, I don’t see how.
well…i guess it’s straight line vs. MACRS method. depreciation, in the long run, is higher under straight line method than MACRS…thus, more tax savings.
zenji, in the long run, i.e., over the life of teh asset, depreciation is the same under any method. The statement above appears in Stalla, and it was not stated as compared to the accelerated method. May be I am missing something, because I think teh statement is correct (judging by the way it was stated in mre than one place), but still not sure that I see how that’s true. Thanks.
Yeah, I would think that the return on investment is actually decreasing over time because results in lower income in the later years than accelerated would. With accelerated, since there is less depreciation in the later years, income would be higher and return on the investment would be higher. Not sure why SL would increase return on investment over time…
I think it is becasue under SL, net income is constant for a project, however your assets decreases in value due to accumulated depreciation…thus resulting in higher ROI over the life of the asset…any thoughts?
But that is true under any depreciation method.
Under accelerated methods of depreciation, return on investment might be higher in some year and lower in other. This is because though you assets will depreciate faster and you will have a lower denominator to calculate ROI / ROA, your net income will might be much lower in the early years than the latter, thus it is not a gradual increase in ROI / ROA measure. However, with SL you get a smooth transition to higher levels of return on investment over a horizon. This is exactly why firms love using SL in financials…
This statement is true. Lets calculate ROA. Under Straight line, depreciation expense is constant. Assuming sales/COGS etc is same, this means Net Profit is constant. However Assets are decreasing b/k of depreciation, so ROA is increasing.
> Under Straight line, depreciation expense is constant. Assuming sales/COGS etc is same, this means Net Profit is constant. However Assets are decreasing b/k of depreciation, so ROA is increasing. Why would that not be true under any other depreciation method?
This seems like an issue with straight-line vs. accelerated when fixed assets are constantly rising (new capital expenditures constantly increases). With the straight-line method in a period of constant expansion, most of the depreciation expense will always be in later periods (until new purchases of fixed assets fall). With accelerated depreciation, the biggest expenses come early on and might counteract the effect of constantly adding new assets at a greater rate than you retire them. So ROI or ROA or ROE all go up because NI is relatively higher in the current period (or any period in which future expenditures > previous expenditures) compared to what it would have been with accelerated depreciation. That, at least, is my interpretation.