Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Useful Life

What it is:

A useful life is the number of years in which an asset can reliably produce benefits.

How it works (Example):

Let's assume you buy a car for $20,000. You believe the car could last for 15 years. After that, the car is probably "run into the ground," and its next stop is the junkyard. Thus, the useful life of the car is 15 years.

In the business world, useful lives are very important because they help companies calculate depreciation. Let's assume Company XYZ purchases a piece of machinery for $1 million, and that piece of machinery has a useful life of 10 years. After that, the machinery is estimated to be worth, say, $10,000. Thus, Company XYZ would record a depreciation expense equal to $990,000 over 10 years (there are a variety of ways to do that).

Why it Matters:

Useful lives are important in business because they affect the size of a company's depreciation or amortization expense (and thus they affect net income). It is important to note, however, that useful lives (and scrap values) are merely estimates. After all, nobody knows what an asset will be worth 10 years in advance or whether it will actually last that long.