What is Useful Life?

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

How Does Useful Life Work?

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 Does Useful Life Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.