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**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.

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**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. |