Annuity Method Of Depreciation

AAA

DEFINITION of 'Annuity Method Of Depreciation'

A method of depreciation centered around cost recovery and a constant rate of return upon any asset that is being depreciated. This method requires the determination of the internal rate of return (IRR) on the cash inflows and outflows of the asset. The IRR is then multiplied by the initial book value of the asset, and the result is subtracted from the cash flow for the period in order to find the actual amount of depreciation that can be taken.

INVESTOPEDIA EXPLAINS 'Annuity Method Of Depreciation'

The annuity method of depreciation is also commonly referred to as the compound interest method of depreciation. If the cash flow of the asset being depreciated is constant over the life of the asset, then this method is called the annuity method. However, the annuity method of depreciation is not endorsed by GAAP principles.

RELATED TERMS
  1. Annuity

    A financial product that pays out a fixed stream of payments ...
  2. Sinking Fund Method

    A technique for depreciating an asset in bookkeeping records ...
  3. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  4. Insurance

    A contract (policy) in which an individual or entity receives ...
  5. Payout

    The expected financial return from an investment over a given ...
  6. Payout Phase

    The phase in an annuity during which payments are made to the ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  3. Markets

    Free Cash Flow: Free, But Not Always Easy

    Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery.
  4. Options & Futures

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  5. Fundamental Analysis

    Taking Stock Of Discounted Cash Flow

    Learn how and why investors are using cash flow-based analysis to make judgments about company performance.
  6. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  7. Professionals

    Are Longevity Annuities in 401(k)s a Good Idea?

    An in depth look at the arrival of longevity annuities in 401(k)s and IRAs.
  8. Retirement

    How To Move From Nest Egg To Income?

    Income vs. a nest egg is closely tied to what most of us are ultimately interested in for retirement – maintaining our standard of living and to travel.
  9. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  10. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center