A building has a replacement cost new of $2,400,000. It suffers from $180,000 in curable physical deterioration, $95,000 in incurable physical deterioration, and $125,000 in external obsolescence. What is the depreciated cost of the improvements?
Correct Answer
A) $2,000,000
Depreciated cost = Replacement cost new - Total depreciation = $2,400,000 - ($180,000 + $95,000 + $125,000) = $2,400,000 - $400,000 = $2,000,000.
Why This Is the Correct Answer
Option A correctly applies the depreciated cost formula by subtracting all forms of depreciation from the replacement cost new. The calculation is: $2,400,000 - ($180,000 + $95,000 + $125,000) = $2,400,000 - $400,000 = $2,000,000. This follows the standard cost approach methodology where all depreciation reduces the value of the improvements from their replacement cost new.
Why the Other Options Are Wrong
Option B: $2,220,000
This answer ($2,220,000) incorrectly subtracts only $180,000 from the replacement cost new, suggesting the candidate only deducted the curable physical deterioration and ignored the incurable physical deterioration and external obsolescence.
Option C: $2,305,000
This answer ($2,305,000) incorrectly subtracts only $95,000 from the replacement cost new, suggesting the candidate only deducted the incurable physical deterioration and failed to account for the other forms of depreciation.
Option D: $2,125,000
This answer ($2,125,000) incorrectly subtracts only $275,000 ($180,000 + $95,000) from the replacement cost new, suggesting the candidate included both types of physical deterioration but failed to deduct the external obsolescence.
ALL DEPRECIATION DEDUCTS (A.D.D.)
A.D.D. = All Depreciation Deducts. Remember that ALL forms of depreciation (physical curable, physical incurable, functional, and external) must be DEDUCTED from replacement cost new.
How to use: When you see a depreciated cost question, think A.D.D. and make sure you subtract every depreciation amount listed, regardless of type. Add up all depreciation first, then subtract the total from replacement cost new.
Exam Tip
Always double-check that you've included every depreciation amount mentioned in the problem - create a quick list and add them up before subtracting from replacement cost new.
Common Mistakes to Avoid
- -Only subtracting one type of depreciation instead of all types
- -Forgetting to add up all depreciation amounts before subtracting
- -Confusing curable vs incurable and thinking incurable depreciation shouldn't be deducted
Concept Deep Dive
Analysis
This question tests the fundamental cost approach calculation for determining depreciated cost of improvements. The cost approach requires appraisers to start with replacement cost new and systematically deduct all forms of depreciation to arrive at the current value of the improvements. Depreciation in appraisal includes physical deterioration (both curable and incurable), functional obsolescence, and external obsolescence. All depreciation amounts must be subtracted from the replacement cost new regardless of their type or curability status.
Background Knowledge
The cost approach requires understanding that depreciated cost equals replacement cost new minus all forms of depreciation. Depreciation includes physical deterioration (curable and incurable), functional obsolescence, and external obsolescence, all of which reduce the value of improvements from their replacement cost new.
Real-World Application
In practice, appraisers must identify and quantify all forms of depreciation when using the cost approach, such as when appraising older buildings, special-purpose properties, or when market data is limited. Each type of depreciation represents real value loss that buyers would recognize.
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