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
A) 25%
Depreciation percentage = Effective Age ÷ Total Economic Life. 15 ÷ 60 = 0.25 or 25%.
Why This Is the Correct Answer
Option A (25%) is correct because it properly applies the age-life formula: Depreciation Percentage = Effective Age ÷ Total Economic Life. Substituting the given values: 15 years ÷ 60 years = 0.25 or 25%. This means that 25% of the building's original value has been lost to depreciation. The calculation is straightforward division that results in a decimal converted to a percentage.
Why the Other Options Are Wrong
Option B: 75%
Option B (75%) represents the remaining economic life percentage, not the depreciation percentage. This would be calculated as (Total Economic Life - Effective Age) ÷ Total Economic Life = (60-15) ÷ 60 = 75%. This shows how much useful life remains, which is the complement of depreciation.
Option C: 4%
Option C (4%) appears to be the result of incorrectly dividing the total economic life by the effective age (60 ÷ 15 = 4), which reverses the proper formula. This calculation has no meaning in depreciation analysis and represents a fundamental misunderstanding of the age-life method.
Option D: 15%
Option D (15%) simply states the effective age in years rather than calculating a percentage. This shows a failure to perform any calculation and misunderstands that the question asks for a depreciation percentage, not the effective age itself.
DEAL Formula
DEAL: Depreciation = Effective Age ÷ Life (total economic). Remember 'making a DEAL' - you're dealing with how much value is lost over time.
How to use: When you see an age-life depreciation question, immediately think 'DEAL' and set up the fraction with effective age on top and total economic life on bottom, then convert to percentage.
Exam Tip
Always double-check that you're putting effective age in the numerator and total economic life in the denominator - reversing these is a common error that leads to meaningless results.
Common Mistakes to Avoid
- -Reversing the formula by dividing total economic life by effective age
- -Confusing effective age with chronological age
- -Calculating remaining life percentage instead of depreciation percentage
Concept Deep Dive
Analysis
This question tests the age-life method of calculating depreciation, which is a fundamental concept in the cost approach to real estate valuation. The age-life method assumes that depreciation occurs at a constant rate over the economic life of a building, creating a straight-line depreciation pattern. This method compares the effective age (how old the building appears to be based on its condition and maintenance) to the total economic life (the period over which the building is expected to contribute to property value). The resulting percentage represents the portion of the building's original value that has been lost due to depreciation from all causes.
Background Knowledge
The age-life method is one of three primary techniques for estimating depreciation in the cost approach, alongside the breakdown method and the market extraction method. Effective age differs from chronological age because it reflects the building's apparent age based on condition, maintenance, and functionality rather than simply when it was built.
Real-World Application
An appraiser evaluating a 15-year-old office building that appears well-maintained might determine it has an effective age of 12 years due to good upkeep, while a poorly maintained building of the same chronological age might have an effective age of 20 years, resulting in different depreciation calculations.
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