[OPE-L:4377] Re: Further Comment on John's Example

Allin Cottrel (cottrell@wfu.edu)
Wed, 12 Mar 1997 09:21:18 -0800 (PST)

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On Wed, 12 Mar 1997, john ernst wrote:

> 1. You seem to be using what is called the "sinking fund" method
> of depreciation in order to arrive at the depreciation charge
> of $62.75 per year... <snip>
> ... [and] the value (in price terms)
> actually transferred over 10 years in this example would be
> 10 * 62.75 or 627.50 and not 1000.

This does seem to be a bit of a puzzle; I can't claim to be
entirely clear on this in my own mind.


> Now if we look at the overall investment, it would seem that
> a profits of 2000 have been produced and that the total
> capital advanced was 7176.25 + 10000. Thus the overall
> on the investments would be
> 2000/(7176.25+10000) or 0.116439

I believe this is confused -- you can't "mix and match"
calculations that involve the "time value of money" (IRR)
and those that involve simply adding up or averaging
quantities of money without regard to their phasing. My
depreciation amount of 62.75 was derived on the assumption
of a discount rate equal to the rate of profit on the