Real Estate Appraisal Practice Exam

Which formula is used with the age-life method to measure depreciation?

1. Effective age ÷ Total economic life = Accrued depreciation

2. Current market value - Purchase price = Depreciation

3. Replacement cost - Depreciated value = Market value

4. Income generated ÷ Capitalization rate = Value

The correct answer is: Effective age ÷ Total economic life = Accrued depreciation

The age-life method of measuring depreciation relies on a specific formula that focuses on the relationship between effective age and total economic life of a property. By using the formula effective age divided by total economic life, one can determine accrued depreciation. This method assumes that the value of a property decreases due to the passage of time and wear and tear, and it provides a systematic approach to quantify that loss in value. The effective age represents how old a property feels based on its condition and any renovations or modifications, while total economic life reflects the total number of years a property can be expected to provide utility. By calculating accrued depreciation in this manner, appraisers gain insight into the property's current value versus its potential value if it were in perfect condition. In contrast, the other formulas provided focus on different aspects of valuation or depreciation that do not specifically align with the age-life method. For instance, the calculation of depreciation based on the difference between current market value and purchase price or deducing market value from replacement costs does not relate directly to assessing how age affects a property's value within the framework of the age-life method. Similarly, income generation and capitalization rate calculations pertain to income-producing properties but do not specifically measure depreciation in the context of age.