California Real Estate SalespersonProperty Valuation and Financial AnalysisMedium
A 15-year-old commercial building has an estimated total economic life of 60 years. Due to excellent maintenance and recent upgrades, an appraiser determines its effective age to be 10 years. If the reproduction cost new is $1,200,000, what is the total accrued depreciation using the age-life method?
- A$300,000
- B$150,000
- C$240,000
- D$200,000
Show answer & explanationAnswer & explanation
Correct answer: D. $200,000
Total accrued depreciation is calculated by dividing the effective age by the total economic life, then multiplying by the reproduction cost new. Depreciation = (Effective Age / Total Economic Life) * Reproduction Cost New. So, (10 years / 60 years) * $1,200,000 = $200,000.
Why the other options are wrong
- A. Incorrect calculation; this would be 1/4th of the cost.
- B. Incorrect calculation; this would be 1/8th of the cost.
- C. Incorrect calculation; this would be 1/5th of the cost, usually if chronological age was used (15/60 * 1.2M).
Total Accrued Depreciation (Age-Life)
The total loss in value from all causes (physical, functional, external) for an improvement, calculated by comparing effective age to total economic life.
- Used in the cost approach to valuation
- Effective age is often different from chronological age
- Calculated as (Effective Age / Total Economic Life) * Reproduction Cost New
Memory trick: Effective Age Over Life Times Cost