An undamaged but functionally inadequate system causes a supported $60,000 loss. Replacement costs $85,000 and restores only $60,000, with no other benefits. What loss classification and deduction fit?
Correct Answer
C) Incurable functional obsolescence, $60,000 supported loss.
The stipulated current value loss is $60,000, and cure cost $85,000 exceeds that benefit. Thus the functional deficiency is economically incurable and the supported loss remains $60,000, not the $25,000 cost-benefit gap. System age alone would not establish the cause without the stated utility evidence.
Why This Is the Correct Answer
Option C is correct because the system is undamaged but functionally inadequate, which is functional obsolescence. The cost to correct ($85,000) is greater than the benefit ($60,000), so it is incurable. The deduction is the supported $60,000 value loss.
Why the Other Options Are Wrong
Option A: Curable functional obsolescence, $85,000, the cost to cure.
Option A is wrong because calling it curable at the $85,000 cost to cure ignores that the fix costs more than the $60,000 it restores. When the cost to correct exceeds the benefit, the item is incurable, and the loss is $60,000.
Option B: Incurable functional obsolescence, the $25,000 cost-benefit gap.
Option B is wrong because the $25,000 cost-benefit gap ($85,000 - $60,000) is not the value loss. The classification as incurable is right, but the deduction is the supported $60,000 loss.
Option D: No loss, because the correction is uneconomic to make.
Option D is wrong because an uneconomic correction does not erase the loss. The property still suffers a supported $60,000 loss, which is measured as incurable functional obsolescence.
Incurable keeps its loss
Incurable does not mean no loss; it means the fix is not worth it, so you deduct the measured loss instead of the cure cost.
How to use: Use this when a question gives both a cure cost and a supported value loss for a design problem.
Exam Tip
Classify first (physical, functional or external), then decide curable or incurable, then pick the supported loss amount.
Common Mistakes to Avoid
- -Deducting the cost to cure for an incurable item
- -Using the cost-benefit gap as the loss
- -Assuming an uneconomic fix means no depreciation
Concept Deep Dive
Analysis
This question tests classifying and measuring functional obsolescence. The deficiency comes from inadequate design, not damage, so it is functional. Because the $85,000 cure cost exceeds the $60,000 benefit, it is incurable, and the deduction is the supported $60,000 loss.
Background Knowledge
Functional obsolescence is loss of value caused by the design of the property itself. When the cost to correct a deficiency is greater than the resulting economic benefit, it is considered incurable, and the loss is measured from market evidence.
Real-World Application
A house's undersized HVAC system works but cannot keep the upper floor comfortable, and paired sales show a $60,000 value loss. Upgrading would cost $85,000, so the appraiser deducts $60,000 as incurable functional obsolescence.
More Cost Approach Questions
The subject is a 10-year-old dwelling with improvement cost new of $640,000. A highly comparable 7-year-old dwelling recently sold for $580,000; at the sale date its site was worth $150,000 and its improvement cost new was $500,000. Market evidence shows depreciation accruing evenly with actual age. What is the depreciated value of the subject improvements?
Observed sale prices are $450,000, $475,000, $425,000, $500,000, $440,000. Calculate the range (maximum−minimum), to the nearest dollar.
Observed values are 100, 105, 110, 115, 120. Calculate the range (maximum−minimum).
For an arithmetic illustration only, depreciate a historical $2,000,000 construction cost on a zero-salvage straight-line 40-year schedule for 10 years. What unindexed scheduled amount remains? This is not a conclusion of current market value or current replacement cost.
For an arithmetic illustration, allocate historical construction cost $2,400,000 over 40 years on a zero-salvage equal annual schedule. After 8 years, what scheduled unindexed amount remains? This is not a current market-value conclusion.
For an arithmetic schedule only, allocate historical cost $2,500,000 over 40 years with zero residual. After 8 years, what unindexed scheduled amount remains? This is not an estimate of current market value.
The sale-price range is $45,000 and the maximum is $385,000. Find the minimum price.
A property is purchased for $1,500,000 with a loan of $1,200,000. Using the purchase price as the value, what is the loan-to-value ratio, as a percentage to one decimal?
Improvement cost new is $1,800,000. Separately supported improvement depreciation deductions of $200,000, $150,000, $100,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Improvement cost new is $500,000. Separately supported improvement depreciation deductions of $125,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
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