A deficiency can be cured today at a cost of $22,000, and the cure would add $25,000 to value. The current cost new of the improvements already includes $14,000, at current prices, for installing the equivalent item in new construction. What deduction for the deficiency avoids counting that amount twice?
Correct Answer
B) $8,000
22000−14000 = 8000;25000>22000 supports cure. Common errors: deducting the full retrofit cost without removing the allowance already in the base gives $22,000; using the value added instead of the retrofit cost gives $11,000; using the net benefit of the cure (value added − cost) as the deduction gives $3,000.
Why This Is the Correct Answer
Option B is correct because the deficiency is curable ($25,000 value added exceeds the $22,000 cost to cure), and the deduction is retrofit cost minus the current allowance already in cost new: $22,000 − $14,000 = $8,000. Deducting the full $22,000 would double count the $14,000 already in the base.
Why the Other Options Are Wrong
Option A: $3,000
Option A, $3,000, uses the net benefit of the cure as the deduction: $25,000 − $22,000 = $3,000. That figure shows the cure is worthwhile but is not the loss; the correct deduction is $22,000 − $14,000 = $8,000.
Option C: $11,000
Option C, $11,000, uses the value added instead of the retrofit cost: $25,000 − $14,000 = $11,000. The deduction uses retrofit cost minus the allowance, $22,000 − $14,000 = $8,000.
Option D: $22,000
Option D, $22,000, deducts the full retrofit cost without removing the $14,000 allowance already in the cost new base. That double counts the item; the correct deduction is $22,000 − $14,000 = $8,000.
Retrofit Minus What's Built In
Deficiency deduction = Cost to retrofit now − Cost already included in cost new. First test that value added exceeds the cure cost.
How to use: Use this when a curable deficiency's item is already priced into the cost new base.
Exam Tip
Check whether the cost new figure already contains the missing item; if it does, deduct only the excess retrofit cost.
Common Mistakes to Avoid
- -Deducting the full retrofit cost when cost new already includes the item
- -Using value added instead of cure cost as the deduction
- -Treating the net benefit of the cure as the loss
Concept Deep Dive
Analysis
This question tests measuring a curable deficiency when the cost new base already includes the cost of installing the item in new construction. The cure is economically justified because the $25,000 value added exceeds the $22,000 cost. To avoid double counting, the deduction is the retrofit cost minus the current allowance already in the base.
Background Knowledge
A deficiency is considered curable when the cost to correct it is less than the economic benefit gained. When cost new already includes an item as it would be installed in new construction, the extra cost of retrofitting it is the measure of loss. This keeps the cost approach from charging the same cost twice.
Real-World Application
A cost estimate for a house includes $14,000 for central air as if built new, but the existing house lacks it and retrofitting would cost $22,000. Since the market shows a $25,000 value gain, the appraiser treats it as curable and deducts $8,000.
More Cost Approach Questions
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