Depreciation
Economic life
The period over which improvements still contribute value to the property
It ends when the building stops adding anything to the value of the land, which is normally long before the structure would fall down. Physical life is how long it stands; economic life is how long it earns its place. A sound building on a site whose highest and best use has moved on can have plenty of physical life left and no economic life at all.
Easily confused with
Remaining economic life is what is left of it as at the date of the appraisal, and that is the figure a cost-approach calculation actually consumes.
How the exam asks about it
The cost approach measures depreciation against economic life, not physical life. Items hand you both figures and watch which one you reach for.
Quick check: Economic life
A question from the practice bank that uses this term.
For the cost approach, a building would cost $360,000 to replace new and has an estimated economic life of 40 years. It is 8 years old. Using straight-line depreciation, what is the depreciated value of the improvement?
Related terms
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