When an asset is written down does future ROA always increase? I’m blanking on this concept right now, it’s from Q57 of the mock (AM session).
If everything else is held constand then yes ROA will always increase when an asset is written down. Think about it: Net Income: 100 Book Value of Assets: 1000 ROA: 10% If you write down assets by 200 to 800 then, Net Income: 100 Book Value of Assets 800 ROA: 12.5% A couple points about this type of questions…let me know if i’m wrong: You are comparing the book value to the UNDISCOUNTED cash flows over its remaining useful life…do not discount! it doesn’t matter in this problem but they could easily test this If the sum of the cash flows over the remaining useful life are less than the salvage value, you STILL write the asset down to the sum of the cash flows (even though you could theoretically sell it for the salvage value which is higher).
Thanks CJB, that makes sense.