Technical discussion on depreciation modeling versus national accounts

period approaches zero. Depreciation increases absolutely each year, and increases even faster in ratio to capital. What | have just modeled is depreciation rising exponentially from zero at the start to a maximum at the end. National accounts show the exact opposite. They show it decreasing exponentially from a maximum at the start. The reason for the difference is instructive. I would rather trust the present value formula to show what assets are worth subjectively to their owners. The national accounts prefer to trust evidence as to what they are worth to others if sold. That’s a solid method too if the evidence is likely to prove representative. It isn’t in cases where transactions are more likely to have been driven by pressure to sell than pressure to buy. Plant is generally tailored to purposes of its first owner, and not meant to be resold. Plant sales tend to follow disappointing results. These are likelier to come early as business plans are first tested. That could explain why evidence without logic has suggested that depreciation tends to start fast and slow down with time. ] would recommend that national accounts continue tracking actual sales as an indicator of true depreciation curves, but limit the study to rental buildings expected from the start to be resold several times. | mean apartment buildings, office buildings and warehouses designed along standard lines. Many investors specialize in buying and selling these tradable assets for portfolio purposes. Pressure to buy and pressure to sell tend to balance. I can testify that prices bid for them are found either by discounted cash flow or internal rate of return (IRR) methods. IRR is a variant of the same thing. A bid price is modeled as the original negative cash flow in evaluating the proposed purchase. Then the positive cash flows at each year’s end are modeled, and the discount rate found which nets present value of all flows together to zero. If this rate is judged competitive, the purchase goes ahead. This method was originated by Keynes in the General Theory as his “marginal product of capital”. Chapter 2: Fast Forward 1/06/16 21 HOUSE_OVERSIGHT_010961