How can economic life differ from physical life?
Correct Answer
A) Economic contribution may end before the structure’s physical serviceability ends.
Economic life concerns the period of value contribution; physical life concerns physical serviceability. Improvements can remain standing after their economic contribution ends. Neither always equality nor a universal numerical gap follows; the estimates must be supported for the assignment.
Why This Is the Correct Answer
Option A is correct because economic life is the period during which the improvement contributes to value, and that contribution may end while the structure is still physically serviceable. Economic life is usually less than physical life, which this option correctly describes.
Why the Other Options Are Wrong
Option B: Both lives must end on the identical calendar date.
Option B is wrong because it claims both lives must end on the identical calendar date. Economic contribution can end before physical serviceability does, so the two lives can differ.
Option C: Physical life is the shorter of the two because obsolescence does not affect value.
Option C is wrong because it says physical life is the shorter of the two and that obsolescence does not affect value. Obsolescence does reduce value, which is a reason economic life is usually shorter than physical life.
Option D: Chronological age is the required measure of both lives.
Option D is wrong because it says chronological age is the required measure of both lives. Economic and physical life are estimates of total duration, and actual age does not define either one.
Standing is not contributing
A building can still stand after it stops adding value. Physical life measures standing; economic life measures contributing.
How to use: Use this phrase to recall which life usually ends first when comparing economic and physical life.
Exam Tip
Choose answers that let economic life end before physical life; be cautious of options requiring both lives to match exactly.
Common Mistakes to Avoid
- -Assuming economic life and physical life are the same
- -Believing obsolescence does not affect value
- -Using actual age as a substitute for total economic life
Concept Deep Dive
Analysis
This question tests the difference between economic life and physical life. Economic life is the period during which an improvement contributes to property value, while physical life is how long it remains physically serviceable. A building can keep standing after it no longer adds value, so economic life usually ends first.
Background Knowledge
Economic life is the period over which an improvement contributes to the total value of the real property. Physical life is the period over which it can physically last with normal maintenance. Functional and external factors can end an improvement's economic contribution while it is still physically sound, so economic life is usually shorter.
Real-World Application
An older house is structurally sound, but its chopped-up floor plan and outdated systems no longer appeal to buyers, and the land is worth nearly as much as the property. The appraiser concludes that its economic life is ending even though its physical life could continue for many years.
More Cost Approach Questions
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Direct improvement costs are $430,000. Additional soft costs are 12% of direct, and separate entrepreneurial incentive is $38,400. None overlap. Supported total improvement depreciation $110,000 applies to the complete cost. Add site $200,000. What total indication results?