Depreciation & Obsolescence Analysis Flashcards
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Read the first 7 Depreciation & Obsolescence Analysis flashcards as text
When using market extraction to estimate depreciation, an appraiser compares:
Answer: The reproduction cost new of comparable sold assets to their actual sale prices to derive implied depreciation
Market extraction works backward from actual transactions by comparing reproduction cost new of sold assets to their sale prices, yielding a market-derived depreciation rate.
Which of the following best describes 'remaining economic life' of a business asset?
Answer: The estimated number of years from the appraisal date during which the asset is expected to continue contributing value
Remaining economic life is the estimated time from the date of appraisal through the point at which the asset will no longer contribute economic value.
In the breakdown method of estimating depreciation, the appraiser:
Answer: Separately identifies and quantifies physical deterioration, functional obsolescence, and external obsolescence before summing them
The breakdown method requires the appraiser to isolate each form of depreciation individually and then aggregate them into a total accrued depreciation figure.
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?
Answer: $375,000
Depreciation = (5 ÷ 20) × $500,000 = $125,000; depreciated value = $500,000 − $125,000 = $375,000.
Which type of obsolescence is MOST likely to affect all businesses within an entire industry simultaneously?
Answer: External (economic) obsolescence from broad market or regulatory forces
External obsolescence stems from macro-level economic, regulatory, or market forces that typically impact an entire industry or market segment rather than isolated individual assets.
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:
Answer: Fewer than 10 years, because superior maintenance results in a condition better than average for the asset's age
Effective age can be less than chronological age when an asset is in above-average condition, as its physical state is more consistent with that of a younger asset.
The primary purpose of estimating accrued depreciation in the cost approach to business valuation is to:
Answer: Adjust the reproduction or replacement cost new downward to reflect the asset's current contributory market value
In the cost approach, accrued depreciation is deducted from reproduction or replacement cost new to bridge from theoretical new cost to the asset's actual current contributory value in the market.