CFA Practice Question

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.
You need to log in first to add your comment.