An obvious objection to our first counterexample is that it did not include physical depreciation
of the capital stock, and thus may have been an unfair test of Young's position.
Even if reliable data exists that can be used to accurately characterize the retirement distribution of every type of capital, the problem of separating the forces of physical depreciation
and obsolescence still remains.
= Structure Actual Age/Structure Physical Life x Replacement Cost New + Cost to Cure CMI
This takes into account the fact that depreciation should allow not only for physical depreciation
but also for functional obsolescence, economic obsolescence, and downward market fluctuations.
Accounting profit here is defined as the N PI market value, minus MVS replacement cost less physical depreciation
and functional obsolescence, divided by MVS replacement cost less physical depreciation
and functional obsolescence; it excludes those periods that suffered external obsolescence.
Of the total loss in value, $500,000 is physical depreciation
, so the property suffers the balance $10,736,666 in functional or external obsolescence.
The MM cost center is 20% physically depreciated and the NI cost center is brand new with no physical depreciation
and an economic remaining life less than the remaining economic life of the main structure.
The appraiser should also attempt to determine when the living improvements actually begin to acc rue physical depreciation
. If the permanent planting is truly the highest and best use of the land, the living planting may not experience physical depreciation
until it reaches maturity, although the ancillary infrastructure (irrigation and trellis systems) may begin to lose value from the moment of installation.
These costs new must then be reduced to reflect the remaining useful life of the subject property by deducting for physical depreciation
. The next step is to deduct for functional obsolescence.
Because the kitchen is not new, physical depreciation
should be deducted.
The breakdown method of measuring accrued depreciation typically lists the causes in the following order: curable physical depreciation
, incurable physical depreciation
, curable functional obsolescence, incurable functional obsolescence, and external obsolescence.
The breakdown method of estimating physical depreciation
entails estimating "all items of depreciation individually"(1) then adding the individual estimates together and deducting the sum from the estimated reproduction or replacement cost.