An appraiser estimates the current cost new of the improvements at $520,000 and depreciation at 20% of that cost. A separate improvement loss of $28,000 does not overlap that depreciation. The site is valued at $140,000, which already reflects any site influences. What is the total indicated value by the cost approach?
Correct Answer
B) $528,000
520000×(1−0.2)−28000+140000 = 528000. Common errors: leaving out the site value gives $388,000; leaving out the separate $28,000 loss gives $556,000; not deducting the 20% depreciation gives $632,000.
Why This Is the Correct Answer
Option B is correct because 20% depreciation leaves 80% of cost new: $520,000 × 0.8 = $416,000. Deducting the separate $28,000 loss gives $388,000, and adding the $140,000 site gives $528,000.
Why the Other Options Are Wrong
Option A: $388,000
Option A, $388,000, leaves out the site value: $520,000 × 0.8 − $28,000 = $388,000. Adding the $140,000 site gives $528,000.
Option C: $556,000
Option C, $556,000, leaves out the separate $28,000 loss: $520,000 × 0.8 + $140,000 = $556,000. That loss must be deducted too, giving $528,000.
Option D: $632,000
Option D, $632,000, does not deduct the 20% depreciation: $520,000 − $28,000 + $140,000 = $632,000. Applying the 20% first gives $416,000 − $28,000 + $140,000 = $528,000.
Percent Good, Then Subtract, Add
Multiply cost new by percent good, subtract any separate dollar losses, then add the site.
How to use: Use this sequence when a question mixes percentage and dollar depreciation.
Exam Tip
List each stated deduction and addition before calculating, then confirm each one appears exactly once.
Common Mistakes to Avoid
- -Leaving out site value
- -Forgetting a separate stated loss
- -Skipping the percentage depreciation
Concept Deep Dive
Analysis
This question combines a percentage depreciation with a separate fixed-dollar loss and site value. The 20% is applied to cost new, the separate $28,000 loss is deducted, and then site value is added. Each component must be included once.
Background Knowledge
The complement of a depreciation percentage is percent good, the share of cost new that remains. In a breakdown approach, total depreciation is the sum of the individual estimates, provided they do not overlap. Site value, already reflecting site influences, is added after the improvement losses.
Real-World Application
An appraiser applies 20% physical depreciation to a $520,000 cost new and also deducts $28,000 for a functional problem measured separately. She adds a $140,000 site value from land sales for a $528,000 indication.
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