Depreciation & Obsolescence Analysis Flashcards
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Read the first 7 Depreciation & Obsolescence Analysis flashcards as text
What are the three main types of depreciation recognized in business appraisal?
Answer: Physical deterioration, functional obsolescence, and external obsolescence
In appraisal practice, the three recognized forms of depreciation are physical deterioration, functional obsolescence, and external (economic) obsolescence.
Which type of depreciation results primarily from wear, tear, and physical damage to a business asset?
Answer: Physical deterioration
Physical deterioration refers to the loss in value due to wear, age, or physical damage that accumulates through normal use of the asset.
In the cost approach to business valuation, depreciation is best defined as:
Answer: The total loss in value from any cause, measured from the asset's reproduction or replacement cost new
In the cost approach, accrued depreciation represents the total loss in value from all causes measured against the cost to reproduce or replace the asset as new.
What is 'curable' depreciation in the context of business appraisal?
Answer: Depreciation where the cost to remedy the deficiency is justified by the resulting increase in value
Curable depreciation exists when repairing or correcting the deficiency is economically feasible because the cost to cure is offset by the resulting gain in value.
An appraiser estimating the 'effective age' of a business asset is determining:
Answer: The age the asset appears to be based on its condition, regardless of its actual chronological age
Effective age reflects how old an asset appears to be based on its physical condition and utility, which may be greater or less than its actual chronological age.
The age-life method of estimating depreciation uses which formula?
Answer: Depreciation = (Effective Age ÷ Total Economic Life) × Reproduction Cost New
The age-life method calculates depreciation as the ratio of effective age to total economic life multiplied by the reproduction cost new of the asset.
'Total economic life' in depreciation analysis refers to:
Answer: The total estimated period from new through the point at which the asset no longer contributes value
Total economic life spans from the time the asset is new to the point it is no longer expected to contribute economic value, serving as the denominator in the age-life formula.