Economic life
Economic life is the period of actual usefulness of an asset. Economic life refers to the period beyond which it is cheaper to replace or scrap an asset than to continue maintaining it. Economic life should not be confused with the depreciable life of an asset..
Depreciable Life, on the other hand, is the time period over which an asset can lawfully be depreciated. For some assets, management can simply choose a number of years for the depreciable life, based on the the asset's expected useful life. For other kinds of assets, however, the depreciable life is prescribed by the country's tax authorities. In the US, for instance, computing hardware has a prescribed depreciable life of 5 years, and depreciation must follow the MACRS (Modified Accelerated Cost Recovery System) depreciation schedule.
An asset's depreciable life can be different from its economic life. Economic life and depreciable life are both central concepts when planning the acquisition of assets and in the practice of asset life cycle management. In planning investments in assets, for instance, the asset's economic life must be known in order to estimate investment metrics such as net present value, internal rate of return, and return on investment. Economic life, also is an important consideration for vendors and customers alike, when establishing warranties and service plans.
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