CFA Practice Question
A firm has a constant pre-depreciation income using assets that last 5 years. The straight-line method results in a ROA that ______ over the life of the assets. The accelerated methods result in a ROA that ______ over the life of the assets.
A. increases, increases
B. decreases, increases
C. increases, decreases
Explanation: The straight line and all accelerated depreciation methods giving an increasing rate of return on assets over the asset life (the pre-depreciation income is held constant to isolate the effect). This is a mathematical fact which you can easily prove.
User Contributed Comments 4
| User | Comment |
|---|---|
| Kuki | how? |
| takor | Both methods result in declining balances of assets over the assets' life, thus decreasing the denominator in the rate of return of assets computation. |
| StanleyMo | yup, something like ROA , the A keep on decreasing under depreciation, and you have R constant, so ROA is increasing. |
| mc42086 | Ooooo! I wasn't thinking. I was thinking Tax would go up in later years bringing income down. |