# depreciation

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## depreciation,

n the charges against earnings to write off the cost, less salvage value, of an asset over its estimated useful life. It is a bookkeeping entry and does not represent any cash outlay, nor are any funds earmarked for the purpose. There are three classic methods of applying depreciation: straight line, sum of the year's digits, and double declining balance.

## depreciation

the decline in value over time of capital items.
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Because Marshall and Swift depreciation schedules only consider effective age and economic life, they are not amenable to calculating physical depreciation of the core structure by the breakdown method.
The convex form of the depreciation function implied by the breakdown method of estimating physical depreciation can be demonstrated by example.
When combined with the depreciation curve for the long-lived components, total physical depreciation also takes on a convex shape, which is indicative of the form of physical depreciation function implied by the breakdown method [ILLUSTRATION FOR FIGURE 3 OMITTED].
If the land component of value is assumed to increase in value over time, then a forecast of estimated property value will be even more convex in form as increases in land value offset decreases in property value due to physical depreciation.
This is because the rate of physical depreciation is more rapid in early years as short-lived items age and less rapid in later years due to the relatively slow rate of decline in the value of the core structure.
Note that rents decrease relatively rapidly in the early aging years and much more gradually in the later years consistent with the breakdown method of computing physical depreciation.
Further, physical depreciation is typically minimal for newer properties, implying that value loss derived is attributable to external obsolescence.
Physical depreciation for each sale was based on the age/life method; effective ages for the properties were considered equivalent to chronological age, with economic lives estimated at 35 years, based on averages in Marshall & Swift Cost Service.
If the physical facility were ten years old (effective physical age), this sale would thus indicate physical depreciation of 20%.

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