Improvement cost new is $450,000. Separately supported improvement depreciation deductions of $45,000, $25,000, $15,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $125,000, already reflecting any site losses. What total indicated value results?
Correct Answer
B) $490,000
450000−(45000+25000+15000)+125000 = 490000. Common errors: leaving out the site value gives $365,000; deducting only the largest depreciation item gives $530,000; not deducting any depreciation gives $575,000.
Why This Is the Correct Answer
Option B is correct because total depreciation is $45,000 + $25,000 + $15,000 = $85,000. Then $450,000 − $85,000 = $365,000, plus the $125,000 site value equals $490,000.
Why the Other Options Are Wrong
Option A: $365,000
Option A, $365,000, is only the depreciated improvement value ($450,000 − $85,000). It leaves out the $125,000 site value; adding it gives $490,000.
Option C: $530,000
Option C, $530,000, deducts only the largest item ($450,000 − $45,000 + $125,000). All three nonoverlapping items must be deducted: $450,000 − $85,000 + $125,000 = $490,000.
Option D: $575,000
Option D, $575,000, adds site value to cost new with no depreciation ($450,000 + $125,000). Deducting the $85,000 total depreciation gives $490,000.
Sum the losses, add the land
Add each nonoverlapping depreciation item, subtract the sum from cost new, then add site value.
How to use: Use this sequence for any cost approach total with several listed deductions.
Exam Tip
Count the depreciation items and include all of them. Then confirm whether the question asks for a total that includes site value.
Common Mistakes to Avoid
- -Deducting only one depreciation item
- -Omitting site value from the total
- -Not deducting depreciation at all
Concept Deep Dive
Analysis
This question tests the cost approach with multiple depreciation items. The three nonoverlapping deductions are summed and subtracted from cost new. Site value is then added for the total.
Background Knowledge
In the breakdown method, total depreciation is the sum of the separate physical, functional and external estimates. The cost approach indication equals cost new less total depreciation plus site value. Site value should already reflect losses attributable to the land.
Real-World Application
An appraiser identifies worn roofing, an outdated kitchen and a nearby nuisance as separate, nonoverlapping losses. Summing them, deducting from cost new and adding site value gives the cost approach result.
More Cost Approach Questions
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