Seems a little odd - AInvestments - Page 50

CFA Level II
#1

How they deal with Incureable and cureable aspects when doing the Cost approach seems a little odd. They tend to use the ratio of effective age to total economic life for items that relate to Cureable Phsyical depreciation to get the amount of incureable physical deprecation.

But they just subtract out cureable functional, incureable functional without using the ratio method. I’m assuming you only use the ratio of effective age to total economic life when finding the INCUREABLE PHYSICAL depreciation but not the Incureable Function.

It’s a blue box question on page 50. Think that must be the case or is there some logic I’m mssing. Thanks

#2

Perhaps because the the physical incurable depeciation relates to the physical condition of the property and it directly reduces the expected economic life. It affects the depretiation cash flows in the income statement. A functional depreciation affects your cash flows indirectly, e.g. decreases revenues due to under-utilized capactiy or inflates fixed costs for maintenance.

#3

I think you’re right. Good little trick to not get fooled on though.