A building's actual age is 25 years, effective age 18, and total economic life 55. Age-life depreciation is:
Correct Answer
C) 32.7 percent of cost new
Why this is correct: In the age-life method, depreciation is calculated as Effective Age divided by Total Economic Life. Here, effective age (18 years) divided by total economic life (55 years) equals 0.327, or 32.7% of the cost new. Why the other choices are wrong: "Cannot be computed without actual age" is false because effective age, not actual age, is used. "45.5 percent of cost new" incorrectly uses actual age (25/55). "18 percent of cost new" mistakenly uses effective age as a direct percentage without dividing by total life. Exam tip: For age-life depreciation, use: (Effective Age / Total Economic Life) x Cost New. Ignore actual age for the calculation.
Why This Is the Correct Answer
Effective age of 18 divided by total economic life of 55 equals 0.327, or 32.7 percent of cost new. Actual age plays no role in the formula, so the 25-year figure is set aside. The implied remaining economic life is 37 years, consistent with a building in better-than-typical condition for its calendar age.
Why the Other Options Are Wrong
Option A: Cannot be computed without actual age
Claiming the calculation cannot proceed without actual age misstates the method, which requires only effective age and total economic life. Actual age is useful for context and for judging whether an effective age estimate is reasonable, but it is never an input to the ratio. The problem is fully solvable as written.
Option B: 45.5 percent of cost new
45.5 percent is 25 over 55, built from actual age instead of effective age. It is the single most attractive wrong answer because the stem deliberately leads with the actual age. Using it would overstate depreciation by nearly thirteen percentage points of cost new.
Option D: 18 percent of cost new
18 percent takes the effective age and reads it as a percentage without dividing by total economic life. Years and percentages are different units, and the conversion is the entire calculation. This error would understate depreciation substantially.
Ignore the Calendar
When both ages appear in a stem, the calendar age is scenery. Cross it out on the page before you compute so your eye cannot grab it. Only the appraiser's judgment of apparent age goes into the fraction.
How to use: Physically strike through the actual age on your scratch paper. Then divide effective age by total economic life and match the resulting percentage against the options.
Exam Tip
Any age-life question that supplies three ages is testing whether you can discard the irrelevant one; the actual age is nearly always the decoy.
Common Mistakes to Avoid
- -Substituting actual age for effective age in the numerator
- -Reading effective age as a percentage without dividing
- -Believing the calculation requires actual age to proceed
Concept Deep Dive
Analysis
This stem supplies an actual age that the calculation does not use, which is the entire point of the question. In the age-life method, depreciation is measured by effective age, the appraiser's judgment of apparent age from condition and utility, over total economic life. Actual age is offered as context and as a distractor generator; when effective age is lower than actual age, as here, the property has been maintained or updated better than typical. Note also that the answer is requested as a percentage, so the calculation stops at the ratio and never touches a dollar figure. Reading what form of answer is wanted is half the work.
Background Knowledge
You need to know that the age-life ratio uses effective age, not actual age, and that total economic life is the denominator. You also need to be comfortable expressing the result as a percentage of cost new rather than as a dollar amount when the question asks for it.
Real-World Application
A well-maintained twenty-five-year-old building with updated systems presents to buyers as considerably newer, so the appraiser records both ages in the report, explains the difference, and calculates depreciation from the effective age only.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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
Previous Question
In a breakdown analysis, why are short-lived items removed from the cost basis before applying the long-lived age-life ratio?
Next Question
A new highway causes a monthly rent loss of $150. The gross rent multiplier in this market is 110, and the site accounts for 25% of total property value. How much external obsolescence is charged to the improvements?