Economic Life

Published Mar 24, 2023

Definition of Economic Life

Economic life refers to the period during which a capital asset remains useful and productive in providing value to its owner. This period is determined by various factors like wear and tear, technological advancement, and market demand. The concept of economic life is essential in accounting, finance, and real estate.

Example

Let’s take the example of a personal computer. On average, the economic life of a personal computer is around four to six years. During this time, the computer is productive and provides value to its owner. However, after this period, the computer becomes outdated, runs slower, and becomes incompatible with new software programs. Therefore, its value reduces significantly, and it may require repair and maintenance, which can be costly.

Another example of can be found in the real estate business. After a certain period, buildings may require repairs or renovation, or the market demand may diminish. For instance, a shopping mall that was once popular may see a decline in foot traffic due to changing consumer preferences or the rise of e-commerce. In such cases, the economic life of the shopping mall may come to an end, and it may be more profitable to demolish the building and use the land for a different purpose.

Why Economic Life Matters

Understanding the concept of economic life is essential for assessing the value of an asset, planning for its replacement or renovation, and making informed financial decisions. An accurate estimation of the economic life of an asset is also critical for financial reporting and tax purposes.

Moreover, the economic life of an asset can have significant implications for its resale value, as well as environmental and societal factors. Therefore, policymakers, businesses, and individuals must consider the concept of economic life when making financial and investment decisions.