Aswath Damodaran 193
And the Accounting View of Return
Year
After-tax
Operating
Income
BV of
Capital:
Beginning
BV of
Capital:
Ending
Average BV
of Capital ROC
1 $ 0 $ 2 , 500 $ 3 , 500 $ 3 , 000 NA
2 - $ 165 $ 3 , 500 $ 4 , 294 $ 3 , 897 - 4. 22 %
3 - $ 77 $ 4 , 294 $ 4 , 616 $ 4 , 455 - 1. 73 %
4 $ 75 $ 4 , 616 $ 4 , 524 $ 4 , 570 1. 65 %
5 $ 206 $ 4 , 524 $ 4 , 484 $ 4 , 504 4. 58 %
6 $ 251 $ 4 , 484 $ 4 , 464 $ 4 , 474 5. 60 %
7 $ 297 $ 4 , 464 $ 4 , 481 $ 4 , 472 6. 64 %
8 $ 347 $ 4 , 481 $ 4 , 518 $ 4 , 499 7. 72 %
9 $ 402 $ 4 , 518 $ 4 , 575 $ 4 , 547 8. 83 %
10 $ 412 $ 4 , 575 $ 4 , 617 $ 4 , 596 8. 97 %
$ 175 $ 4 , 301 4. 23 %
This converts the accounting income into a percentage return (to enable us to do
the comparison to the hurdle rate, which is a percentage rate)
The average book value is computed each year using the beginning and ending
book values. The book values themselves are computed as follows:
Ending BV = Beginning BV - Depreciation + Capital Expenditures
