Florida Real Estate Broker ExaminationValuation and Market AnalysisMedium
An appraiser is using the cost-depreciation approach to value a 20-year-old commercial building. The appraiser estimates the reproduction cost new of the building at $1,500,000. The total economic life of the building is estimated to be 50 years. What is the accrued depreciation using the straight-line method?
- A$30,000
- B$900,000
- C$450,000
- D$600,000
Show answer & explanationAnswer & explanation
Correct answer: D. $600,000
To calculate accrued depreciation using the straight-line method, first find the annual depreciation: Reproduction Cost New / Total Economic Life = $1,500,000 / 50 years = $30,000 per year. Then, multiply the annual depreciation by the effective age: $30,000/year * 20 years = $600,000.
Why the other options are wrong
- A. This is the annual depreciation, not the total accrued depreciation.
- B. This is an incorrect calculation.
- C. This is an incorrect calculation.
Accrued Depreciation (Straight-Line)
Accrued depreciation calculated using the straight-line method assumes a constant rate of depreciation over the property's economic life.
- Formula: (Reproduction Cost New / Total Economic Life) * Effective Age.
- Economic life is the period over which an asset is expected to be economically useful.
- Effective age is the age indicated by the property's condition and utility, which may differ from its chronological age.
Memory trick: Cost divided by Life, then multiplied by Age.