A building has an effective age of 15 years and a total economic life of 60 years. Using the age-life method, what is the depreciation percentage?
Correct Answer
B) 25%
Using the age-life method: Depreciation = Effective Age ÷ Total Economic Life = 15 ÷ 60 = 0.25 or 25%.
Why This Is the Correct Answer
Option B (25%) is correct because the age-life method uses a simple division formula: Effective Age ÷ Total Economic Life. In this case, 15 years ÷ 60 years = 0.25 or 25%. This means that 25% of the building's total economic life has been consumed, resulting in 25% depreciation. The calculation is straightforward and represents the proportion of useful life that has already elapsed.
Why the Other Options Are Wrong
Option A: 20%
Option A (20%) results from an incorrect calculation, possibly confusing the numbers or using an improper formula that doesn't follow the standard age-life method.
Option C: 30%
Option C (30%) appears to be a miscalculation, perhaps from rounding errors or using incorrect values in the age-life formula.
Option D: 75%
Option D (75%) represents the remaining useful life percentage (45 years remaining ÷ 60 years total = 75% remaining), which is the opposite of what the question asks for - this would be the percentage of life remaining, not the depreciation percentage.
EAT Formula
Remember 'EAT' - Effective Age over Total life. Just like eating consumes food over time, effective age consumes the total economic life of a building. The fraction you've 'eaten' (Effective Age ÷ Total life) equals your depreciation percentage.
How to use: When you see an age-life depreciation question, immediately think 'EAT' and set up the fraction: Effective Age on top, Total economic life on bottom, then convert to percentage.
Exam Tip
Always double-check that you're calculating depreciation percentage (life consumed) and not remaining life percentage - these are opposite values that add up to 100%.
Common Mistakes to Avoid
- -Calculating remaining life percentage instead of depreciation percentage
- -Confusing effective age with chronological age
- -Forgetting to convert the decimal result to a percentage
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 economic life of a building. The concept relies on comparing how much of the building's useful life has already been consumed (effective age) against its total expected useful life (economic life). This straightforward ratio provides appraisers with a percentage that represents the accumulated depreciation from all causes - physical deterioration, functional obsolescence, and external obsolescence.
Background Knowledge
The age-life method assumes linear depreciation over time and is one of three primary methods for estimating depreciation in the cost approach (along with the breakdown method and market extraction method). Effective age represents the age of a building based on its condition and utility, which may differ from chronological age, while total economic life is the period over which a building contributes to property value.
Real-World Application
An appraiser evaluating a 15-year-old office building would use the age-life method as a starting point for depreciation analysis, then adjust based on actual market conditions, maintenance quality, and functional adequacy to arrive at a more precise depreciation estimate.
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