Question

All else equal, will the PPE turnover ratio of a firm that only uses straight-line depreciation methods be higher, lower, or the same as the PPE turnover ratio of a firm that only uses accelerated depreciation methods ? (Assume that the PPE is not fully depreciated when answering this question.)

Answer 1

Solution:

All else equal, PPE turnover ratio of a firm that only uses straight-line depreciation methods to be lower than PPE turnover ratio of a firm that only uses accelerated depreciation methods.

PPE turnover ratio = Net Sales / (Property plant and equipment - Accumulated depreciation)

If company is using straight line method of depreciation, then its book value of PPE will be higher than book value of PPE of a company who is using accelerated depreciation methods.

Therefore we divide net sales by higher book value of PPE then PPE trunover ratio will be lower.