A house with effective age 12 and total economic life 60 has cost new of $290,000 plus a site worth $85,000. Its cost-approach value is:
Correct Answer
D) $317,000 after 20% depreciation on the improvements
Why this is correct: Depreciation rate = Effective Age / Total Economic Life = 12/60 = 20%. Depreciated improvement value = $290,000 × (1 - 0.20) = $232,000. Total value = Depreciated Improvements + Site Value = $232,000 + $85,000 = $317,000. Why the other choices are wrong: "$290,000 even, roughly splitting the difference" ignores depreciation and site value. "$375,000 with no depreciation" incorrectly adds the full cost new to the site value. "$232,000 for the building alone" is only the depreciated building cost, omitting the site value. Exam tip: In the cost approach, always add the site value after calculating depreciated improvement value.
Why This Is the Correct Answer
Option D is right because twelve divided by sixty is twenty percent depreciation, leaving improvements at two hundred thirty-two thousand, and adding the eighty-five thousand site value gives three hundred seventeen thousand. Working the steps in order and writing each intermediate figure down is what prevents the omissions the other choices represent. In a full assignment the cost new would also account for entrepreneurial incentive where the market recognizes it, and site improvements such as paving and landscaping would be handled explicitly. The result is one indication of value, to be reconciled against the sales comparison and income approaches.
Why the Other Options Are Wrong
Option A: $290,000 even, roughly splitting the difference
Two hundred ninety thousand is simply the cost new of the improvements restated, which both ignores twenty percent depreciation and omits the site entirely. It happens to sit between the correct answer and the building-only figure, which is what makes it superficially plausible. Neither of the two operations the problem requires has been performed.
Option B: $375,000 with no depreciation
Three hundred seventy-five thousand adds full cost new to site value with no depreciation deducted, which would describe a brand-new building with no effective age at all. The stem supplies an effective age and an economic life precisely so that depreciation is computed. This is the most common single-step omission in cost approach problems.
Option C: $232,000 for the building alone
Two hundred thirty-two thousand is the depreciated cost of the improvements and is a correct intermediate figure, but it stops one step short by leaving out the site. The cost approach conclusion is always improvements plus land. Selecting it means the arithmetic was right and the final addition was skipped.
Depreciate the building, add the land
Two commands, in order. Depreciate the building - cost new times one minus effective age over economic life. Then add the land, untouched, because dirt does not wear out. Skip either command and one of the wrong answers is waiting for you.
How to use: Write three lines before computing: cost new, less depreciation, plus site. Fill them in from the stem, and check that your answer exceeds the depreciated building figure by exactly the site value. That single check eliminates every distractor here.
Exam Tip
Land is never depreciated in the cost approach; any answer that applies the depreciation percentage to the site value or to the combined total is wrong on that ground alone.
Common Mistakes to Avoid
- -Omitting the site value from the final conclusion
- -Failing to deduct depreciation when effective age and economic life are given
- -Applying the depreciation percentage to land or to the combined total
- -Confusing the depreciated improvement figure with the property value indication
Concept Deep Dive
Analysis
This question runs the full cost approach in miniature, which is why it is a favorite exam construction. The approach has three moving parts: estimate the cost new of the improvements, subtract accrued depreciation to arrive at their depreciated contribution, then add the value of the site as though vacant and available for its highest and best use. Site value is estimated separately, typically by sales comparison, and is never depreciated, because land does not wear out. Here depreciation comes from the age-life method - twelve years of effective age against a sixty-year total economic life is twenty percent consumed - so the improvements retain eighty percent of two hundred ninety thousand, or two hundred thirty-two thousand. Adding the eighty-five thousand site value produces three hundred seventeen thousand. The three distractors each drop one of the three steps, which is exactly how these items are built.
Background Knowledge
You need the cost approach sequence - cost new of improvements, less accrued depreciation, plus site value - and the age-life depreciation formula. You should also know that site value is estimated separately and is not depreciated, the distinction between reproduction and replacement cost, the role of entrepreneurial incentive and profit where the market recognizes them, and that site improvements are handled as a separate component.
Real-World Application
An appraiser valuing a well-maintained twenty-year-old home assigns an effective age of twelve against a sixty-year economic life, applies that twenty percent to a cost new of two hundred ninety thousand, and adds a site value of eighty-five thousand drawn from three recent lot sales. The three-hundred-seventeen-thousand indication is then weighed against the sales comparison result.
More Cost Approach Questions
In a cost approach for a proposed building, the appropriate cost basis is generally:
A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
The age-life method expresses depreciation as:
Market extraction of depreciation is limited by the fact that it:
Functional obsolescence caused by a deficiency is measured as curable when:
Curable physical deterioration is measured at cost to cure because:
A 2,050 sq ft dwelling is priced at $178 per square foot with a $34,000 detached garage and $21,500 of site improvements. Cost new is:
A house has three bedrooms sharing one bathroom, and adding a second bath is economically justified. This is:
Direct costs in a construction budget include:
An appraiser writes that a 40-year-old house has an effective age of 10 but describes original wiring, original kitchen and a 25-year-old roof. The report's problem is:
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