Illinois Real Estate Practice Exam

What is the present value of a building and land that collectively cost $540,000 to build and sit on a parcel of land worth $250,000 using the straight-line method of depreciation if the building is 5 years old with a remaining economic life of 45 years?

1. $500,000 and $320,000

2. $486,000 and $250,000

3. $540,000 and $250,000

4. $736,000 and $486,000

The correct answer is: $736,000 and $486,000

To determine the present value of the building and the land using the straight-line method of depreciation, we begin with the original cost of both the building and land. The combined initial cost is $540,000 for construction and $250,000 for the land. However, land does not depreciate, so its value remains constant at $250,000. The building, however, does depreciate over time. To calculate the depreciation on the building, we need the original cost allocated to the building itself. Since we know the total construction cost of both, if we assume the entire initial construction value is attributed to the building, we can then calculate how much of that value has depreciated. The building has a total economic life of 50 years (5 years old and a remaining life of 45 years). The straight-line depreciation method divides the total building cost by the total years of economic life to find annual depreciation. If we are using a total of $540,000 for the building (since the land is valued separately and does not depreciate), we derive the annual depreciation like this: 1. Total economic life = 50 years 2. Annual depreciation = $540,000 / 50 years = $10,800 In five