Average Age of Assets

Average Age of Assets - 9/22/2009 AverageAgeofAssets One...

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9/22/2009 1 Average Age of Assets One way to detec low quality earnings One way to detect low quality earnings is to compute average age of assets, AAA Di t d Al t Expense on Depreciati on Depreciati Accumulate AAA =
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9/22/2009 2 AAA Example Suppose that a firm begins operations with depreciable assets worth $100,000. The assets will be depreciated straight line to a zero salvage value over a 5 year life. First, assume that the firm acquires no additional depreciable assets over the 5 year period. The annual depreciation expense (ADE) will be: 000 , 20 $ 5 000 , 100 $ . = = = Years of No Base e Depreciabl ADE AAA Example (cont’d) The average age of assets is: ( on Depreciati d Accumulate AAA ) = ( year AAA year AAA Expense on Depreciati 2 ) 000 , 20 ($ 2 1 000 , 20 $ 000 , 20 $ ) 1 = = = = on so and years AAA years 3 000 , 20 $ ) 000 , 20 ($ 3 000 , 20 $ 3 2 = =
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9/22/2009 3 AAA Example (cont’d) Now consider that the firm acquires new depreciable assets at the beginning of year 3. These assets have an installed cost of $50 000 and also will be depreciated over a 5 $50,000 and also will be depreciated over a 5 year life to a zero salvage value. The annual depreciation expense (ADE) for these will be:
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Average Age of Assets - 9/22/2009 AverageAgeofAssets One...

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