If Double declining method is used to depreciate , It will reduce net income. However, it will also reduce assets. How does it affects ROA? ROA = Net income/ Assets I had selected double declining method in the following problem, assuming that asset value will be reduced more for first years, so ROA wil be higher. -------------------------- Which depreciation method results in the highest return on assets (ROA) in the first years of an asset’s life? A) Double declining balance. B) Sum-of-the-years’ digits. C) Straight line. D) All of these methods result in the same ROA. Your answer: A was incorrect. The correct answer was C) Straight line. Straight-line depreciation results in the highest return on assets because the double declining balance (DDB) and sum of the year’s digits (SYD) methods are accelerated depreciation methods where net income is reduced more than the straight line depreciation method.
if you take a number example is the easiest if you have 30 mil net income and 40 mil assets and you reduce them both by 10 milion, Roa from 75% goes to 66%. Therefore you have to choose the method that reduces less the income and the assets in order to have the highest return on assets. all is based i guess on the fact that is highly unprobable to have a return on assets over 100%