Question

as an investor, if you wanted to look at the real cost of ownership and value of an asset, would you not want your company to use an accelerated depreciation method so as to give you the most true and stable real cost of asset ownership.

Answer 1

Depreciation: Depreciation is a continuous reduction in the value of an asset due to the wear and tear of an asset. It is recorded as an expense in the income statement of the financial statements of the company. There are various methods of Depreciation. Some of teh popular methods are Straight line Method and Accelerated Methods.

Straight line Method: Straight line method is one of the commonly used method. It is calculated by deducting the salvage value of the asset from the initial cost of the asset and the resultant is divided by the useful life of the asset.

Depreciation = (Cost of the Asset - Salvag Value) / Useful life

Accelerated Double Decliing Method: This method is used for income tax purposes. It is twice the value of depreciation under the Sstraight line method. So, the value of the asset is writte off quickly when compared to the straight line method.

Depreciation = 2 * [(Cost of the Asset - Accumulated Depreciation) / Useful life]

In straight line method, the depreciation of the asset is equal for the useful life of the asset and the book value of the asset and the income will be more when compared to the accelerated double declining method. Accelerated Method is used for tax savings and the expense recorded also increases , decreasing the net income and the book value of the asset. But when the assets useful life is more and there is outdated in the technology used, theere is a need to write off the asset as soon as possible as there will be no economic benefits in the fuure. In such a case it is better to use the accelerated method.

So, other things being constant, if I want to know the real cost of. the ownership and the value of the asset and I dont want the company to use an Accelerated depreciation method, instead I use Straight line method