A building is 15 years old with an effective age of 12 years and a total economic life of 60 years. Using the age-life method, what is the percentage of physical depreciation?
Correct Answer
B) 20%
Physical depreciation using age-life method = Effective Age ÷ Total Economic Life. 12 years ÷ 60 years = 0.20 or 20%.
Why This Is the Correct Answer
Option B (20%) correctly applies the age-life formula: Effective Age ÷ Total Economic Life = Physical Depreciation Percentage. Using the given data: 12 years (effective age) ÷ 60 years (total economic life) = 0.20 or 20%. The calculation uses effective age, not actual age, because effective age better reflects the property's true condition and remaining utility. This percentage represents how much of the building's total economic life has been consumed based on its current condition.
Why the Other Options Are Wrong
Option A: 25%
25% incorrectly uses the actual age instead of effective age in the calculation (15 ÷ 60 = 0.25 or 25%), which violates the age-life method principle of using effective age to reflect true condition.
Option C: 12%
12% appears to confuse the effective age (12 years) with the depreciation percentage, failing to complete the division calculation required by the age-life method.
Option D: 15%
15% appears to confuse the actual age (15 years) with the depreciation percentage, failing to apply the proper age-life formula that requires division by total economic life.
EAT Formula
EAT: Effective Age over Total economic life = depreciation percentage. Think 'The building has been EATEN away by time' - use Effective Age divided by Total life.
How to use: When you see an age-life depreciation question, immediately look for the effective age and total economic life, then think 'EAT' to remember the formula: Effective Age ÷ Total = depreciation percentage.
Exam Tip
Always use effective age, not actual age, in age-life calculations - the exam often provides both to test if you know which one to use.
Common Mistakes to Avoid
- -Using actual age instead of effective age in the calculation
- -Forgetting to divide by total economic life and just using the effective age as the percentage
- -Confusing the age-life method with other depreciation methods like the breakdown method
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 estimates physical depreciation by comparing a property's effective age (the age based on condition and maintenance) to its total economic life (the period over which improvements contribute value). The key distinction is using effective age rather than actual chronological age, as properties can be maintained better or worse than typical for their age. This method assumes depreciation occurs at a steady, linear rate over the property's economic life.
Background Knowledge
The age-life method assumes that depreciation occurs at a constant rate over a property's economic life, making it a straight-line depreciation method. Effective age reflects the property's condition relative to its actual age - a well-maintained 15-year-old building might have an effective age of only 12 years, while a poorly maintained building could have an effective age greater than its actual age.
Real-World Application
An appraiser evaluating a 15-year-old office building notices excellent maintenance and recent updates, determining an effective age of 12 years against a 60-year economic life, resulting in 20% depreciation rather than the 25% that would result from using actual age.
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