A building has a reproduction cost of $1,200,000. Land value is $300,000 and the total property value is $1,100,000. Using the extraction method, what is the total depreciation?
Correct Answer
D) $400,000
Why this is correct: The extraction method isolates depreciation by subtracting the depreciated value of improvements from their reproduction cost. Step 1: Find depreciated improvement value: Total Value - Land Value = $1,100,000 - $300,000 = $800,000. Step 2: Depreciation = Reproduction Cost - Depreciated Improvement Value = $1,200,000 - $800,000 = $400,000. Why the other choices are wrong: '$100,000' is the difference between total value and reproduction cost. '$800,000' is the depreciated improvement value. '$200,000' is not supported by the calculation. Exam tip: Extraction formula: Depreciation = Reproduction Cost - (Total Value - Land Value).
Why This Is the Correct Answer
Option B ($400,000) correctly applies the extraction method formula. First, we determine the current value of improvements by subtracting land value from total property value: $1,100,000 - $300,000 = $800,000. Then we subtract this current improvement value from the reproduction cost new to find total depreciation: $1,200,000 - $800,000 = $400,000. This represents the total loss in value from the original reproduction cost.
Why the Other Options Are Wrong
Option A: $100,000
Option A ($100,000) incorrectly calculates depreciation as simply the difference between reproduction cost and total property value ($1,200,000 - $1,100,000), failing to account for the land value component.
Option B: $800,000
Option B ($800,000) incorrectly uses the current value of improvements ($800,000) as the depreciation amount, which would mean the improvements have no remaining value.
Option C: $200,000
Option C ($200,000) appears to be an arbitrary calculation that doesn't follow the extraction method formula and has no logical basis in the given data.
EXTRACT the Building Value
Remember 'EXTRACT': E-xtract improvement value (Total Property - Land), X-amine reproduction cost, T-ake the difference, R-ecord as depreciation, A-lways subtract land first, C-ompare to cost new, T-otal depreciation found.
How to use: When you see extraction method questions, immediately identify the three key numbers: reproduction cost, total property value, and land value. Then follow EXTRACT: subtract land from total to get current improvement value, then subtract that from reproduction cost.
Exam Tip
Always write out the extraction formula: Depreciation = Reproduction Cost - (Total Property Value - Land Value). This two-step approach prevents the common error of forgetting to subtract land value first.
Common Mistakes to Avoid
- -Subtracting land value from reproduction cost instead of total property value
- -Using total property value as the depreciation amount
- -Forgetting to subtract land value entirely and using reproduction cost minus total property value
Concept Deep Dive
Analysis
The extraction method is a technique used in the cost approach to determine total depreciation by working backwards from market data. It extracts the depreciated value of improvements by subtracting land value from total property value, then compares this to the reproduction cost new. This method is particularly useful when you have reliable market data for the total property value and land value, but need to determine how much depreciation has occurred. The extraction method assumes that the difference between what improvements cost new and their current contributory value represents total depreciation from all sources.
Background Knowledge
The extraction method is one of several techniques used in the cost approach to estimate depreciation, alongside the age-life method and breakdown method. It requires reliable market data for both total property value and land value, making it dependent on good comparable sales analysis.
Real-World Application
Appraisers use the extraction method when appraising older properties where comparable sales exist but determining specific depreciation amounts is difficult. For example, when appraising a 50-year-old office building, an appraiser might use recent sales of similar properties and land values to extract how much depreciation the market recognizes.
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