Question

Assume the appraiser believes that all of the appliances in a small apartment complex will have to be replaced at the end of five years. The appraiser determines that $5,000 will have to be put aside each year in an interest bearing account (at 3%) in order to have enough funds available at the end of five years to replace the appliances. If this $5,000 is included in the estimation of net operating income, it is typically referred to as

Answer 1

If the $5,000 put in an interest-bearing account for replacement is included in the estimation of the net operating income, it is typically referred to as a Depreciation Reserve.

What is depreciation?

Depreciation refers to an accounting method that allocates the cost of a tangible or physical asset over its useful life.

While the purpose of depreciation is to spread the cost of an asset over the financial periods in which the asset is put to use, investing an amount equivalent to the depreciation amount in a special account provides the cash needed for replacement.

Thus, if the $5,000 put in an interest-bearing account for replacement is included in the estimation of the net operating income, it is typically referred to as a Depreciation Reserve.

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