What Is Economic Age Life Method Of Depreciation? Examples.

What Is Economic Age Life Method Of Depreciation?

The economic age-life method (also called the straight line method) is a common technique used by appraisers to estimate depreciation. It involves calculating the ratio of the effective age of a property to its total economic life.

The effective age reflects the amount of wear and tear and maintenance on a property. It can be higher or lower than the actual chronological age.

The total economic life is the period over which improvements to a property are expected to contribute value. It is usually shorter than the physical life or lifespan of the improvements.

The formula is:

(Effective Age / Total Economic Life) x Replacement Cost New = Depreciated Value

So if a property has an effective age of 10 years, a total economic life of 30 years, and a replacement cost new of $300,000, the depreciated value would be:

(10/30) x $300,000 = $100,000

The depreciated value is then subtracted from the replacement cost new to derive the accrued depreciation. Some key factors in applying this method accurately include properly estimating the effective age and total economic life.

Regular maintenance and updates can lower the effective age, while excessive wear and tear can increase it. The total economic life is based on typical lifespans for the type of improvements.

Key Takeaways:

• The Economic Age Life Method is a commonly used technique for estimating depreciation in residential appraisals.
• This method assumes a constant average annual deterioration rate.
• Depreciation is calculated by multiplying the Effective Age to Economic Life ratio by the Replacement Cost new.
• Actual Age is not considered in the estimation process.
• The Economic Life is determined by adding the Effective Age to the Remaining Economic Life.

Modified Economic Age/Life Method of Depreciation

The Modified Economic Age/Life Method of estimating depreciation is a variation of the traditional age/life method that takes into account both curable and incurable depreciation in the estimation process. This method is particularly useful when a building has a significant amount of curable physical depreciation and/or curable functional obsolescence.

The key concept behind the Modified Economic Age/Life Method is to treat curable depreciation and obsolescence as if they are 100% depreciated, while considering the incurable components using the age/life method. By doing so, this method provides a more accurate estimation of the total accrued depreciation of the subject property.

The formula for estimating depreciation by the Modified Economic Age/Life Method involves calculating the incurable depreciation as (Cost New – Curable Depreciation) x (Effective Age) / (Total Economic Life), and then adding the curable depreciation to get the total accrued depreciation.

This allows appraisers to account for both the deterioration that can be fixed or addressed (curable) and the deterioration that cannot be remedied (incurable).

This modified approach to estimating depreciation takes into account the specific conditions of a property, allowing for a more comprehensive assessment of its value. By differentiating between curable and incurable depreciation, appraisers can provide a more accurate estimation that reflects the true state of the subject property.

Estimating Physical Deterioration: Age-Life Method

In the field of appraisals, estimating physical deterioration is crucial in determining the value of a property. One commonly used method for this purpose is the age-life method. This method involves calculating physical depreciation based on the effective age and total economic life of the property.

The age-life method follows a simple formula: the effective age of the property divided by the total economic life, multiplied by the total replacement cost new of the improvements. The effective age, although not necessarily the same as the actual age, is an appraiser’s opinion of the property’s age.

It takes into account factors such as maintenance, wear and tear, and other relevant considerations. Accuracy is essential when using the age-life method, particularly in determining the total economic life. The total economic life refers to the anticipated lifespan of the property, taking into account any foreseeable changes in its functionality or value.

It is important to gather accurate support and data to ensure an accurate estimation of physical deterioration. By employing the age-life method, appraisers can assess the extent of physical depreciation in a property.

This information is crucial for determining its value and ensuring fair and accurate appraisals. Understanding the age-life method and its calculation process enables appraisers to provide reliable estimates of physical deterioration that align with industry standards.