Certified Residential Appraiser Practice Exam

How does the Age-Life Method calculate depreciation?

1. By assessing the physical condition of the property

2. Using a percentage from effective age versus total economic life

3. By comparing similar properties in the market

4. By estimating based on the original cost of construction

The correct answer is: Using a percentage from effective age versus total economic life

The Age-Life Method calculates depreciation by using a percentage derived from the comparison of effective age to total economic life of a property. This method operates on the principle that as a property ages, it experiences depreciation in value. The effective age reflects the condition or functionality of a property compared to a newer equivalent, while the total economic life refers to the estimated total period a property is expected to be usable. Therefore, the formula for depreciation in this method is determined by dividing the effective age by the total economic life and then multiplying that by the replacement cost of the property. This results in a straight-line calculation of depreciation, taking both physical wear and economic factors into account. By evaluating the property in this way, appraisers can objectively assess how much value has been lost due to age and condition, leading to a more accurate estimation of depreciation. The other methods mentioned, such as assessing physical condition or comparing similar properties, involve qualitative judgments or comparative analysis rather than the systematic calculation provided by the Age-Life Method. Techniques based on original construction costs also do not effectively capture the current state of the property or market dynamics in the same structured manner as the Age-Life approach.