A building has an effective age of 15 years and a remaining economic life of 35 years. Using the age-life method, what is the depreciation percentage?
Correct Answer
A) 30%
Total economic life = 15 + 35 = 50 years. Depreciation percentage = Effective age ÷ Total economic life = 15 ÷ 50 = 30%.
Why This Is the Correct Answer
Option A (30%) is correct because it follows the proper age-life method formula. First, we calculate the total economic life: 15 years (effective age) + 35 years (remaining economic life) = 50 years total. Then we apply the depreciation formula: effective age ÷ total economic life = 15 ÷ 50 = 0.30 or 30%. This represents the percentage of the building's total economic life that has been consumed.
Why the Other Options Are Wrong
Option B: 43%
Option B (43%) appears to result from incorrectly dividing the remaining economic life by the total economic life (35 ÷ 50 = 70%) and then subtracting from 100%, or possibly from dividing effective age by remaining life (15 ÷ 35 = 43%). Neither calculation follows the proper age-life method formula.
Option C: 70%
Option C (70%) incorrectly calculates the remaining useful life percentage rather than the depreciation percentage. This results from dividing remaining economic life by total economic life (35 ÷ 50 = 70%). While 70% represents the remaining useful life, the question asks for depreciation percentage.
Option D: 57%
Option D (57%) does not follow any logical calculation pattern for the age-life method. This percentage cannot be derived from the given data using proper depreciation formulas and likely represents a calculation error or confusion with other depreciation methods.
EAT Formula
EAT: Effective Age over Total life. Remember 'EAT your depreciation' - Effective Age divided by Total economic life gives you the depreciation percentage you need to 'eat' or subtract from reproduction cost.
How to use: When you see an age-life depreciation question, immediately think 'EAT' and set up the fraction: Effective Age on top, Total life (effective age + remaining life) on bottom, then convert to percentage.
Exam Tip
Always add effective age and remaining economic life first to get total economic life before calculating the depreciation percentage - this is the most commonly missed step.
Common Mistakes to Avoid
- -Forgetting to add effective age and remaining life to get total economic life
- -Calculating remaining useful life percentage instead of depreciation percentage
- -Using remaining economic life as the denominator instead of total economic life
Concept Deep Dive
Analysis
The age-life method is a fundamental depreciation calculation technique used in the cost approach to real estate valuation. This method assumes that depreciation occurs at a steady, linear rate over the total economic life of a building. The concept relies on determining the total economic life (effective age plus remaining economic life) and then calculating what percentage of that total life has already been consumed. This straightforward approach provides a baseline depreciation estimate, though it may not account for all market conditions or physical deterioration patterns.
Background Knowledge
The age-life method assumes that buildings depreciate in a straight-line fashion over their total economic life, making it the simplest depreciation calculation in appraisal practice. Total economic life represents the period over which a building contributes to property value, calculated as the sum of effective age and remaining economic life.
Real-World Application
Appraisers use the age-life method as a starting point for depreciation analysis in the cost approach, particularly for newer buildings or when market data for depreciation rates is limited. It provides a baseline that can be adjusted based on actual condition, maintenance, and market acceptance.
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