Question

The 'Economic life' of a building is considered to at an end

1. When the net income form the building fails to justify its existence

2. When the building facilities become obsolete

3. When the capitalization rate becomes high 

Which of the above statements are correct?

1. 1 and 2 only
2. 1 and 3 only
3. 2 and 3 only
4. 1, 2 and 3

Answer 1

Correct Answer - Option 1 : 1 and 2 only

Concept:

Economic life may be a key consideration of owners, it is the expected period of time during which an asset remains useful to the owner.

Valuation is the procedure for determining the present value of an existing property such as building, lad factory, etc. The economic life of building depends upon its selling price in the market or the income it creates in the form of rent, its present value is decided. Other factors affecting the value of a property are its present condition, remaining future life, location, demand, and supply position of the nearby market.

The economic life of building is considered to at an end when net income from building fails to justify its existence, building facilities become obsolete and its condition does not remain useful. So, statement 1 and 2 are correct.

Capitalized value: The capitalized value of the property is the amount of money whose annual interest at the highest prevailing rate of interest will be equal to net income from the property. To determine the capitalized value of the property it must be known net income from the property and the highest prevailing rate of interest.

∴ The capitalized rate will not become high at the end of the economic life of the building. So, statement 3 is wrong.