The current cost new of the improvements is $500,000. Depreciation is estimated at 20% of that cost, and an additional improvement loss of $25,000 is measured separately and does not overlap it. The site value of $140,000 already reflects any site influences. What is the total indicated value by the cost approach?
Correct Answer
B) $515,000
500000×(1−0.2)−25000+140000 = 515000. Common errors: leaving out the site value gives $375,000; leaving out the separate $25,000 loss gives $540,000; not deducting the 20% depreciation gives $615,000.
Why This Is the Correct Answer
Option B is correct because cost new less 20% is $500,000 × 0.80 = $400,000. Subtracting the separate $25,000 loss gives $375,000, and adding the $140,000 site value gives $515,000. Total depreciation is the sum of the separate, nonoverlapping estimates.
Why the Other Options Are Wrong
Option A: $375,000
Option A, $375,000, is the depreciated improvement value ($500,000 × 0.80 − $25,000) without the $140,000 site value. Adding the site gives $515,000.
Option C: $540,000
Option C, $540,000, leaves out the separate $25,000 loss: $500,000 × 0.80 + $140,000. Deducting that loss gives $515,000.
Option D: $615,000
Option D, $615,000, skips the 20% depreciation: $500,000 − $25,000 + $140,000. Applying it gives $400,000 − $25,000 + $140,000 = $515,000.
Cost, minus all losses, plus land
Start with cost new, subtract each separate depreciation item, then add land value.
How to use: Use this sequence for cost approach questions with more than one depreciation item.
Exam Tip
List each deduction and addition before computing. Distractors often drop exactly one step.
Common Mistakes to Avoid
- -Forgetting the separate depreciation item
- -Leaving out the site value
- -Applying the percentage depreciation to site value too
Concept Deep Dive
Analysis
This question tests combining depreciation estimates in the cost approach. The 20% depreciation is applied to cost new, the separate nonoverlapping $25,000 loss is subtracted, and site value is added. All three steps are required.
Background Knowledge
In the breakdown method, total depreciation is the sum of the individual depreciation estimates, provided they do not overlap. The cost approach indication is cost new less total depreciation, plus site value.
Real-World Application
An appraiser applies a general depreciation percentage to a home's cost new and separately deducts the cost of an outdated floor plan feature measured from paired sales. Adding land value supported by lot sales produces the final cost approach indication.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
An appraiser estimates the current replacement cost new of the improvements at $890,000, accrued depreciation from all causes at $170,000, and land value at $325,000. All necessary cost components and depreciation are included in those amounts. What is the indicated property value?
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What best supports a claimed loss from a bathroom-layout deficiency?
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Which scenario most strongly supports giving the cost approach substantial weight?
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A 2,200-sf dwelling costs $200 per square foot, and a separate 400-sf garage costs $75 per square foot. These costs are complete and do not overlap. Both have an effective age of 15 years and a total life of 50 years, with straight-line depreciation and no salvage value. No site value or other loss is involved. What is the combined depreciated cost of the dwelling and garage?
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An external influence causes an annual net income loss of $9,600. The capitalization rate for the loss is 8%, and no other economic factors change. What is the indicated loss in value of the whole property, before allocation between site and improvements?