Depreciation & Obsolescence Analysis Flashcards

Functional obsolescence caused by an outdated design or inadequate technology is best characterized as:

Answer: A superadequacy or deficiency within the asset itself that impairs its utility

Functional obsolescence stems from deficiencies or superadequacies inherent to the asset itself, such as outdated design, insufficient capacity, or excess features.

A factory that consumes significantly more energy per unit of output than modern equivalent facilities is experiencing:

Answer: Functional obsolescence due to a deficiency in operational efficiency

Excess energy consumption relative to modern alternatives is a functional deficiency that reduces the asset's competitive value compared to current-generation equipment.

External (economic) obsolescence is typically classified as incurable because:

Answer: It results from forces outside the owner's control that cannot be remedied by the owner

External obsolescence arises from factors in the broader market or environment that the asset owner cannot remedy, making it inherently incurable from the owner's perspective.

Which method estimates functional obsolescence by capitalizing the difference in operating costs between the subject asset and a modern equivalent?

Answer: Capitalized income loss method

The capitalized income loss method quantifies functional obsolescence by converting the ongoing operating cost disadvantage into a lump-sum present value loss.

'Superadequacy' in a business asset refers to:

Answer: Excess capacity, features, or quality beyond what the market requires or will pay for

Superadequacy occurs when an asset possesses more capacity or features than the market demands, causing a form of functional obsolescence because the excess goes uncompensated in value.

A commercial property's value declines because the surrounding neighborhood has experienced significant economic deterioration. This is an example of:

Answer: External (economic) obsolescence

A decline in surrounding economic conditions is a classic example of external obsolescence, as the cause originates outside the property and is beyond the owner's control.

The 'observed condition' method of estimating physical depreciation requires the appraiser to:

Answer: Physically inspect the asset and estimate the percentage of depreciation for each component based on its actual condition

The observed condition method relies on direct physical inspection, allowing the appraiser to assign depreciation estimates component by component based on actual observed condition.