A cost of $800,000 is charged in equal annual amounts over 40 years, with no salvage value. What is the annual amount?
Correct Answer
C) $20,000
800000÷40 = 20000. Common errors: reporting the total cost instead of the annual charge gives $800,000; reporting a monthly charge instead of the annual charge gives $1,667; counting 41 years (both end points) instead of 40 gives $19,512.
Why This Is the Correct Answer
Option C is correct because a zero-salvage equal annual charge divides the cost evenly over the life: $800,000 ÷ 40 = $20,000 per year. This schedule does not by itself establish how market value changes each year.
Why the Other Options Are Wrong
Option A: $1,667
Option A, $1,667, is a monthly charge rather than an annual one: $800,000 ÷ 40 ÷ 12 = $1,667. The annual amount is $800,000 ÷ 40 = $20,000.
Option B: $19,512
Option B, $19,512, counts 41 years instead of 40: $800,000 ÷ 41 = $19,512. The schedule runs 40 years, so the charge is $800,000 ÷ 40 = $20,000.
Option D: $800,000
Option D, $800,000, is the total cost, not the annual charge. Spreading it evenly over 40 years gives $20,000 per year.
Cost Divided by Years
Equal annual charge = (Cost − Salvage) ÷ Years. With zero salvage it is simply Cost ÷ Years.
How to use: Use this for any straight-line schedule question.
Exam Tip
Check the time unit asked for; annual and monthly charges both tend to appear as options.
Common Mistakes to Avoid
- -Giving a monthly figure when an annual one is asked
- -Miscounting the number of years
- -Treating a book charge as market depreciation
Concept Deep Dive
Analysis
This question tests a simple equal annual allocation, like an accounting depreciation schedule. With zero salvage, the full cost is divided evenly over the number of years. The result is a scheduled charge, not a measure of annual market-value change.
Background Knowledge
For accounting purposes, the rate of depreciation is set when an asset is new, based on a preselected life that fixes the periodic charge. Appraisal depreciation instead measures actual loss in value from all causes as of the effective date. The two can differ substantially.
Real-World Application
An investor's accountant depreciates an $800,000 building at $20,000 per year. The appraiser notes this schedule but estimates the building's actual loss in value from market evidence.
More Cost Approach Questions
An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Income Approach
8.2% of exam