A worn furnace costs $6,000 to replace and adds $3,500 of value, with no other required costs or benefits. How is the deterioration classified?
Correct Answer
B) Economically incurable under the stated cost-benefit test.
The stipulated cure cost $6,000 exceeds the $3,500 benefit with no broader required benefits, so the physical deterioration is economically incurable here. Still measure supported value loss; it is not automatically the cure cost or an averaged figure. Component-specific analysis may be needed rather than a guaranteed age-life capture.
Why This Is the Correct Answer
Option B is correct because the cost to cure ($6,000) exceeds the value the replacement adds ($3,500), with no other benefits. By the cost-benefit test, that makes the deterioration economically incurable. The appraiser still measures the supported value loss, which is not simply the cure cost.
Why the Other Options Are Wrong
Option A: Curable, at the full replacement cost of the furnace.
Option A is wrong because calling it curable at the full $6,000 replacement cost ignores that the replacement adds only $3,500 of value. A repair that costs more than it adds is not economically curable.
Option C: Curable, by averaging the replacement cost and the value benefit.
Option C is wrong because averaging the $6,000 replacement cost and the $3,500 value benefit is not a recognized test. It also wrongly labels the item curable when cost exceeds benefit.
Option D: Ignored until the furnace fails completely in service.
Option D is wrong because waiting until the furnace fails completely ignores deterioration that already affects value. Loss is measured as of the effective date, whether or not the furnace still works.
Worth fixing means curable
If the fix adds at least what it costs, it is curable. If it costs more than it adds, it is incurable.
How to use: Use this whenever a question gives both a cost to cure and the value a repair would add.
Exam Tip
Compare cost to cure with value added. Physical condition alone does not decide curability.
Common Mistakes to Avoid
- -Calling an item curable just because it can be physically fixed
- -Using the full cost to cure as the loss for an incurable item
- -Ignoring wear until the component stops working
Concept Deep Dive
Analysis
This question tests the cost-benefit test for curable versus incurable physical deterioration. An item is economically curable when the value added by the repair equals or exceeds the cost to cure. Here the $6,000 cost exceeds the $3,500 value added, so the deterioration is incurable.
Background Knowledge
Incurable physical deterioration is deterioration that is not economical to repair as of the valuation date, because the cost to cure exceeds the value added. Curable deterioration is the reverse: the value added equals or exceeds the cost.
Real-World Application
An appraiser finds a worn but working furnace that would cost $6,000 to replace, while paired sales suggest buyers would pay only about $3,500 more for a new one. The appraiser treats the item as incurable physical deterioration and measures its supported loss.
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Previous Question
The current cost new of a 2,200-sf dwelling is $195 per square foot. Its effective age is 12 years and its total economic life is 60 years. Using the straight-line age-life method with no salvage value, and with no other depreciation, what is the depreciated cost of the improvements, excluding the site?
Next Question
An appraiser applying the cost approach estimates an improvement cost new of $620,000 and $80,000 of depreciation from other causes. An external factor also reduces annual net income by $4,000. That loss is allocated only to the improvements, has not been counted elsewhere, and is capitalized at 8%. The site is valued at $170,000, which already reflects site influences. What is the indicated value?