California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A building has a reproduction cost new of $300,000 and an estimated economic life of 50 years. If the building's effective age is 10 years, what is the amount of accrued depreciation using the straight-line (age-life) method?
- A$75,000
- B$45,000
- C$60,000
- D$30,000
Show answer & explanationAnswer & explanation
Correct answer: C. $60,000
Straight-line depreciation = (Effective Age ÷ Economic Life) × Cost New = (10 ÷ 50) × $300,000 = $60,000. This method assumes an equal amount of depreciation each year.
Why the other options are wrong
- A. This would result from using a 12.5-year effective age.
- B. This does not match the correct ratio calculation.
- D. This would result from using a 5-year effective age.
Straight-Line (Age-Life) Depreciation
A method of estimating accrued depreciation by dividing effective age by total economic life and applying that ratio to the reproduction/replacement cost.
- Formula: Depreciation = (Effective Age ÷ Economic Life) × Cost New
- Assumes uniform annual depreciation
- Common in the cost approach to appraisal
Memory trick: Age over Life times Cost equals loss!