Assuming an increase in price levels over time, which of the following asset valuations will

produce the highest return on assets?

a. Net book value
b. Gross book value
c. Replacement cost
d. Depreciated replacement cost

SOLUTION

Choice "a" is correct. Return on assets is calculated as net income divided by average total
assets. The lowest denominator will produce the highest return on assets. The net book value
(cost minus accumulated depreciation) would produce the smallest denominator.

Choice "b" is incorrect. The gross book value, calculated as historical cost with no depreciation
would produce a lower return on assets than using net book value.

Choice "c" is incorrect. Since price levels increase, the replacement cost of the asset will be
higher than the net book value and result in a lower return on assets.

Choice "d" is incorrect. There is no recognized accounting valuation of depreciated replacement

cost, but in any case, the replacement cost would be higher than the original cost and result in a
lower return on assets.