Average Age of Assets: CFA Level 1 Exam Answer

C

Note that: Average age = Accumulated depreciation/Depreciation expense. Depreciation expense = 900-800 = 100. Hence, Avg. age = 900/100 = 9 years.

To calculate the average age of the firm's assets at the end of the period, we need to determine the average gross investment and the average accumulated depreciation.

The average gross investment is calculated by taking the sum of the beginning and ending gross investments and dividing it by 2:

Average Gross Investment = (Beginning Gross Investment + Ending Gross Investment) / 2 = (4,000 + 12,000) / 2 = 16,000 / 2 = 8,000

The average accumulated depreciation is calculated in the same manner:

Average Accumulated Depreciation = (Beginning Accumulated Depreciation + Ending Accumulated Depreciation) / 2 = (800 + 900) / 2 = 1,700 / 2 = 850

Now that we have the average gross investment and average accumulated depreciation, we can determine the average age of the firm's assets using the straight-line depreciation method.

Straight-line depreciation calculates the annual depreciation expense by dividing the difference between the beginning and ending accumulated depreciation by the number of years in the period. Since the firm's beginning accumulated depreciation was $800 and the ending balance was $900, the depreciation expense for the period is:

Depreciation Expense = Ending Accumulated Depreciation - Beginning Accumulated Depreciation = 900 - 800 = 100

To find the average age, we divide the average accumulated depreciation by the depreciation expense:

Average Age = Average Accumulated Depreciation / Depreciation Expense = 850 / 100 = 8.5 years

Therefore, the average age of the firm's assets at the end of the period is approximately 8.5 years.