Return on Investment - Depreciation?

should we include Depreciation of plants and other assets while calculating Return on Investment? If not necessay, why?

please advise

Absolutely!

This is the way it works:

When you buy something, you have to record everything that you paid for it:

Original price
delivery charges
installment charges
fees for the sale
taxes for the sale
any other charge directly related to the purchase

The idea here is to create an asset with the TOTAL cost required to put the asset to use in your business.

When you sell, you're going to receive a certain amount of money, and if you sell it for MORE than what you paid, you'll have to report a capital gain and pay a tax on it.

Normally, though, your assets are going to deteriorate over time and become worth less and less, and you'll rarely get an opportunity to make a profit selling them.

So the tax laws are set up for you to deduct the total cost of the equipment as a business expense, but you can't take it all in one year. You have to expense a portion of it over time.

You are never allowed to expense more than you paid (or less than you paid). So when you finally sell the asset, you will still subtract your original cost to find your gain (or loss), but you're not allowed to use the original cost. You have to use your DEPRECIATED cost, because you've already claimed some of it against your earnings.

The amount you've already depreciated, you can never take again, so you carry on your books the "book value", not the original value. If you happen to sell for less than your book value (depreciated value), you're allowed to claim a capital loss.