What is Physical Life?

Physical life is the period of time that an asset remains functional. This time period may be substantially longer than the useful life of an asset, since a functional asset may still be replaced by a more productive asset. Also, the asset may become too expensive to operate profitably after a period of time. As an example, a machine might be able to operate for 20 years (its physical life), but will require much greater maintenance for the final eight years of that period, so its useful life is actually just 12 years.

Example of Physical Life

As an example of physical life, a machine may be able to process 100 units per hour, and can theoretically do so for the next 20 years. However, its useful life may be only 5 years, since it can be replaced at that time by a machine that can process 500 units per hour. In this case, it might make more sense for the company to acquire a replacement machine and keep the old one to provide it with extra capacity for periods in which demand spikes.