Certified Pennsylvania Evaluator Practice Exam

Which method combines direct and indirect approaches to measuring depreciation?

1. Capitalization of income method

2. Sales comparison approach

3. Modified economic age-life method

4. Breakdown method

The correct answer is: Capitalization of income method

The method that combines direct and indirect approaches to measuring depreciation is the capitalization of income method. This approach assesses depreciation not only by looking at the direct costs and physical condition of the asset but also by considering the income-producing potential of the asset. In this method, an evaluator takes into account both the effective age of the property and its economic life to determine a reasonable rate of return and how that affects the asset's value. By intertwining the asset's income generation capabilities with the physical characteristics that lead to depreciation, this method provides a comprehensive viewpoint. The capitalization of income method contrasts with other approaches that may focus solely on comparable sales data or simply account for age and obsolescence without integrating the income element, thus enabling a more nuanced understanding of an asset’s overall value in a market context.