Straight-Line and Accelerated Methods for Calculating Rate of Return in Asset Depreciation | CFA Level 1 Exam Preparation

The Relationship between Rate of Return and Depreciation Methods

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Question

A firm has a constant pre-depreciation income using assets that last 5 years. The straight-line method results in a rate of return that ________ over the life of the assets. The accelerated methods result in a rate of return that ________ over the life of the assets.

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A

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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