 # Depreciation

I see Stalla use this reasoning a lot: The straight-line method results in an increasing return on investment over time. Now without putting this in context of a question, is the above statement true? When you compare it to an Accelerated Deprecation method it is true RELATIVELY speaking, but by itself I don’t think its true. Thoughts? thanks

no it is true for both SL depreciation and DDB depreciation. the book value is decreasing every year, and the revenue generated by the asset stays the same (hypothetically). so return on the asset increases over time. example: 20,000 book value asset SL Dep over 5 years = 4000 per year Revenue = 10000 yr 1: beg book = 20000 end book = 16000 revenue = 10000 return = revenue/avg book = 10000/18000 = 56% yr 2: beg book: 16000 end book: 12000 revenue = 10000 return = 10k/11k = 91% hope this helps.

oooo good point I see it now! Thank you for the example

for yr 2, did you mean to put 11k in the denominator?

topher Wrote: ------------------------------------------------------- > no it is true for both SL depreciation and DDB > depreciation. the book value is decreasing every > year, and the revenue generated by the asset stays > the same (hypothetically). so return on the asset > increases over time. > > example: > 20,000 book value asset > SL Dep over 5 years = 4000 per year > Revenue = 10000 > > yr 1: > beg book = 20000 > end book = 16000 > revenue = 10000 > return = revenue/avg book = 10000/18000 = 56% > > yr 2: > beg book: 16000 > end book: 12000 > revenue = 10000 > return = 10k/11k = 91% > > hope this helps. excellent illustration thanks SL = leads to higher ROA