BCA Depreciation & Obsolescence Analysis 3

Question 1

When using market extraction to estimate depreciation, an appraiser compares:

Accepted Answer

The reproduction cost new of comparable sold assets to their actual sale prices to derive implied depreciation

Answer

The subject asset's book value to similar assets' book values from public filings

Answer

The income generated by the subject to industry average income benchmarks

Answer

The subject asset's tax depreciation schedule to published market rates

Question 2

Which of the following best describes 'remaining economic life' of a business asset?

Accepted Answer

The estimated number of years from the appraisal date during which the asset is expected to continue contributing value

Answer

The period from today until the asset is fully depreciated on a tax basis

Answer

The projected years of operation remaining before the next scheduled major overhaul

Answer

The warranty period still remaining on the asset under manufacturer terms

Question 3

In the breakdown method of estimating depreciation, the appraiser:

Accepted Answer

Separately identifies and quantifies physical deterioration, functional obsolescence, and external obsolescence before summing them

Answer

Applies a single blended depreciation rate to the entire asset as a unit

Answer

Relies solely on published depreciation tables issued by industry associations

Answer

Calculates depreciation based on changes in the asset's net income over time

Question 4

A piece of manufacturing equipment has a reproduction cost new of $500,000, an effective age of 5 years, and a total economic life of 20 years. Using the age-life method, what is the depreciated value?

Accepted Answer

$375,000

Answer

$400,000

Answer

$450,000

Answer

$475,000

Question 5

Which type of obsolescence is MOST likely to affect all businesses within an entire industry simultaneously?

Accepted Answer

External (economic) obsolescence from broad market or regulatory forces

Answer

Physical deterioration from normal wear and tear

Answer

Curable functional obsolescence from design deficiencies

Answer

Superadequacy obsolescence from excess individual asset capacity

Question 6

A piece of equipment has an actual chronological age of 10 years but has been exceptionally well maintained. An appraiser would most likely assign an effective age of:

Accepted Answer

Fewer than 10 years, because superior maintenance results in a condition better than average for the asset's age

Answer

Exactly 10 years, because effective age must always equal actual chronological age

Answer

More than 10 years, because older assets depreciate at an accelerating rate regardless of maintenance

Answer

Zero years, because proper maintenance eliminates all forms of depreciation

Question 7

The primary purpose of estimating accrued depreciation in the cost approach to business valuation is to:

Accepted Answer

Adjust the reproduction or replacement cost new downward to reflect the asset's current contributory market value

Answer

Determine the asset's book value for financial reporting under GAAP

Answer

Calculate the annual tax deduction available to the asset owner

Answer

Establish the asset's insurable replacement value for coverage purposes