An appraiser measures external obsolescence as a percentage of improvement cost remaining after physical and functional deductions. Why is that percentage applied after those deductions?
Correct Answer
D) The percentage was measured on that remaining cost.
Deduction sequence depends on the measured bases and overlap. Here the external percentage is explicitly calibrated on the remainder after other improvement losses, so applying it to cost new instead changes the model. There is no universal USPAP ordering that guarantees freedom from double counting.
Why This Is the Correct Answer
Option D is correct because the external percentage was measured on the remainder after physical and functional deductions. A percentage is only meaningful when applied to the base it was calibrated on. Applying it to cost new instead would change the model and could double count losses.
Why the Other Options Are Wrong
Option A: USPAP prescribes that order for depreciation items.
Option A says USPAP prescribes that order for depreciation items. USPAP does not set a universal ordering of depreciation deductions; the order here follows from how the percentage's base is defined.
Option B: The other losses must be cured before any external loss exists.
Option B says the other losses must be cured before any external loss exists. External loss can exist whether or not physical or functional items are cured; the sequence here concerns the base of the percentage, not curing.
Option C: External loss is by definition the smallest component.
Option C says external loss is by definition the smallest component. External obsolescence is defined by its outside cause, not its size, and it can be larger or smaller than other depreciation items.
Percent needs its base
A percentage means nothing until you know what it is a percentage of. Apply it to the base it was built on.
How to use: Use this whenever a problem gives a percentage deduction tied to a specified base.
Exam Tip
Read percentage definitions carefully; the stated base decides the order of calculation.
Common Mistakes to Avoid
- -Applying a percentage to the wrong base
- -Believing USPAP sets a fixed depreciation order
- -Assuming external obsolescence is the smallest item
Concept Deep Dive
Analysis
This question tests why deduction order matters when a depreciation percentage is defined on a specific base. The external percentage is defined as applying to improvement cost after physical and functional deductions. Applying it to that base follows the model; applying it to cost new would change the model and the result.
Background Knowledge
When depreciation items are measured as percentages, each must be applied to the base on which it was derived. Some valuation guidance applies economic or external obsolescence after physical deterioration and functional obsolescence. Appraisers check bases and overlap to avoid double counting.
Real-World Application
An appraiser's market study measures external loss as a share of improvement value after physical and functional deductions. To stay consistent, the appraiser deducts physical and functional items first, then applies the external percentage to the remainder.
More Cost Approach Questions
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