Definition of annuity method of depreciation

focusing upon cost recovery and a constant rate of return on the investment in depreciable assets; also called compound interest method of depreciation. This method entails first obtaining the Internal Rate of Return (IRR) on the cash inflow and outflow of the asset. Then the asset's beginning book value is multiplied by the IRR and this amount is subtracted from the cash flow for the period to determine the periodic depreciation charge. If cash flow is constant over the determined life of the asset, it is then called the annuity method. This method is not used in practice and not recommended by Generally Accepted Accounting Principles (GAAP).