Calculating Accounting Profit with Straight-Line Depreciation

Summary

The document asks whether a proposed grocery store meets an accounting profitability hurdle, given its purchase cost, annual revenue and expenses, a ten-year operating period, and full depreciation of the property over that period. The answer focuses on the accounting profit calculation: subtract operating costs and annual depreciation from revenue. Straight-line depreciation spreads the property’s purchase cost evenly across the stated years.

Using the figures in the question, annual depreciation equals the annual operating margin, leaving zero annual accounting profit under these assumptions. The response therefore concludes that the store does not appear attractive on this accounting measure if the property’s value truly declines by the full purchase amount. The question also mentions financing cost, tax, continuous interest, and an accounting-return threshold, but the answer does not model them or compare discounted cash flows. Its conclusion is limited to the stated accounting-profit calculation and the assumed depreciation.

Key ideas

• Accounting profit subtracts operating costs and depreciation from revenue.
• Straight-line depreciation allocates the property’s purchase cost evenly over its useful life.
• Under the stated assumptions, annual depreciation offsets the store’s operating margin.
• The answer evaluates accounting profit, not a discounted investment return or a full tax and financing model.

Tags

# Accounting profitability


# Accounting profitability












Can anyone please help me how to solve this problem?

> Grocery Freshly want to open a new store. They expect an initial cost of 30,000 to buy the property in which the store will be. After opening, the annual cost of 10,000 is expected to generate 13,000 over the next 10 years. Real estate will be depreciated by regular yearly depreciation (after 10 years the whole property will be depreciated). Does opening such a store looks like a good idea in terms of accounting profitability, if the price of capital is 8% p.a., profit tax 30% and we require at least 10% p.a. accounting profitability? Consider continuous interest.

So I thought that the net accounting value is 0, since the whole property will be depreciated, average annual profit is 2100, since 13000-10000=3000, however without tax it is 2100 and Investment=30000

So my formula is:

ARR(Accounting rate of return)=$\frac{2100}{30000/2}=0.14$

Is that correct?

## Answer by dm63 (score 2, accepted)

https://quant.stackexchange.com/a/50505

Annual Accounting Profit = Revenues -costs - depreciation

Revenues =13000

Costs= 10000

Annual depreciation = 30000/10yrs = 3000

Therefore annual accounting profit =0

If you believe that the property market value will indeed depreciate like this, it doesn’t seem like a good investment.

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