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?
Correct Answer
D) $1,045,000
First deduct all accrued depreciation from improvement cost new: $890,000 − $170,000 = $720,000. Add the separate land value: $720,000 + $325,000 = $1,045,000. Do not omit land, add depreciation, or deduct the same loss twice.
Why This Is the Correct Answer
Option D is correct because the cost approach subtracts depreciation from cost new and then adds land value. $890,000 - $170,000 = $720,000 depreciated cost of improvements, and $720,000 + $325,000 = $1,045,000. The cost approach values a property as land plus construction costs less depreciation.
Why the Other Options Are Wrong
Option A: $1,215,000
Option A, $1,215,000, skips the depreciation deduction: $890,000 + $325,000 = $1,215,000. Subtracting the $170,000 of depreciation gives the correct $1,045,000.
Option B: $720,000
Option B, $720,000, is the depreciated cost of the improvements alone: $890,000 - $170,000 = $720,000. It leaves out land; adding $325,000 gives the correct $1,045,000.
Option C: $890,000
Option C, $890,000, is replacement cost new alone. It neither deducts the $170,000 depreciation nor adds the $325,000 land value; the correct result is $890,000 - $170,000 + $325,000 = $1,045,000.
Cost minus wear plus dirt
Cost new minus depreciation, plus land: building cost less its losses, plus the dirt underneath.
How to use: Use this to set up any cost approach value calculation.
Exam Tip
Write the formula first (cost new - depreciation + land) and check that each given figure is used once.
Common Mistakes to Avoid
- -Forgetting to add land value
- -Adding depreciation instead of subtracting it
- -Deducting the same depreciation twice
Concept Deep Dive
Analysis
This question tests the basic cost approach formula. Deduct accrued depreciation from replacement cost new to get depreciated improvement value, then add land value. The calculation is $890,000 - $170,000 + $325,000 = $1,045,000.
Background Knowledge
The cost approach estimates value as land value plus the depreciated cost of improvements. Depreciation includes physical deterioration, functional obsolescence and external obsolescence. The approach is most reliable for newer properties, where depreciation is small and easier to support, and it is often relied on for special-purpose buildings that rarely sell or rent.
Real-World Application
An appraiser values a three-year-old custom home using the cost approach. The appraiser estimates replacement cost new from a cost service, deducts depreciation supported by market evidence, and adds land value from recent lot sales to reach the indication.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
Improvement cost new is $595,000. Separately supported improvement depreciation deductions of $48,000, $27,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $155,000, already reflecting any site losses. What total indicated value results?
What best supports a claimed loss from a bathroom-layout deficiency?
Improvement cost new is $1,850,000. Separately supported improvement depreciation deductions of $310,000, $620,000 are expressly nonoverlapping and not already excluded from cost new. No site is included. What depreciated improvement amount results?
Which scenario most strongly supports giving the cost approach substantial weight?
A cost total $650,000 explicitly includes $40,000 of non-realty FF&E outside the appraised real-property interest. Exclude it. Supported realty-only total depreciation is $55,000. Add site $200,000, with no overlap. What real-property cost indication results?
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?
A new feature in the improvements has a current cost of $45,000 and a market contribution of $18,000. The entire difference is due to superadequacy, with no physical or external loss and no overlap. What is the loss from the superadequacy?
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?
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Previous Question
Current dwelling construction is 1,850 sf at $162/sf. A separate 480 sf garage costs $58/sf. Additional site improvements cost $19,000. All amounts use consistent coverage; no item is already counted elsewhere and land is excluded. What total improvement cost new results?
Next Question
The hard and soft costs of the improvements are $460,000 and $40,000, and together they include all required costs. Physical deterioration is estimated at 22% of their sum. External obsolescence of $15,000, attributable only to the improvements, is separate and does not overlap the physical deterioration. The site value, which already reflects site influences, is $145,000. What is the indicated value by the cost approach?