BCA Depreciation & Obsolescence Analysis

Question 1

What are the three main types of depreciation recognized in business appraisal?

Accepted Answer

Physical deterioration, functional obsolescence, and external obsolescence

Answer

Straight-line, declining balance, and sum-of-years digits

Answer

Economic, technical, and legal depreciation

Answer

Book depreciation, tax depreciation, and market depreciation

Question 2

Which type of depreciation results primarily from wear, tear, and physical damage to a business asset?

Accepted Answer

Physical deterioration

Answer

Functional obsolescence

Answer

External obsolescence

Answer

Economic obsolescence

Question 3

In the cost approach to business valuation, depreciation is best defined as:

Accepted Answer

The total loss in value from any cause, measured from the asset's reproduction or replacement cost new

Answer

The reduction in net income attributable to an aging asset

Answer

The annual tax deduction an owner claims for an asset

Answer

The difference between an asset's book value and its market value

Question 4

What is 'curable' depreciation in the context of business appraisal?

Accepted Answer

Depreciation where the cost to remedy the deficiency is justified by the resulting increase in value

Answer

Depreciation that can be recovered through future inflation

Answer

Depreciation caused by external market forces beyond the owner's control

Answer

Depreciation recognized under GAAP that can be reversed in future periods

Question 5

An appraiser estimating the 'effective age' of a business asset is determining:

Accepted Answer

The age the asset appears to be based on its condition, regardless of its actual chronological age

Answer

The actual number of years since the asset was manufactured

Answer

The remaining useful life of the asset going forward

Answer

The age at which the asset was last overhauled or refurbished

Question 6

The age-life method of estimating depreciation uses which formula?

Accepted Answer

Depreciation = (Effective Age ÷ Total Economic Life) × Reproduction Cost New

Answer

Depreciation = Replacement Cost × (Market Rate ÷ Useful Life)

Answer

Depreciation = Original Cost − Salvage Value

Answer

Depreciation = Annual Decline Rate × Current Book Value

Question 7

'Total economic life' in depreciation analysis refers to:

Accepted Answer

The total estimated period from new through the point at which the asset no longer contributes value

Answer

The number of years the asset has already been in service

Answer

The IRS-mandated depreciation schedule for the applicable asset class

Answer

The remaining term of any financing secured by the asset