Improvement cost new $500,000 has supported 62% good factor accounting for all loss. Add supported site $240,000. What total results?
Correct Answer
C) $550,000
500000×0.62+240000 = 550000. Common errors: leaving out the site value gives $310,000; applying the depreciation share (38%) instead of the 62% good factor gives $430,000; not applying the good factor gives $740,000.
Why This Is the Correct Answer
Option C is correct because $500,000 × 0.62 = $310,000 of depreciated improvement value. Adding the $240,000 site value gives $310,000 + $240,000 = $550,000. This is the depreciated improvements plus site value.
Why the Other Options Are Wrong
Option A: $310,000
Option A, $310,000, is only the depreciated improvement value ($500,000 × 0.62). It leaves out the $240,000 site value; adding it gives $550,000.
Option B: $430,000
Option B, $430,000, applies the 38% depreciation share instead of the 62% good factor: $500,000 × 0.38 + $240,000 = $430,000. The correct calculation is $500,000 × 0.62 + $240,000 = $550,000.
Option D: $740,000
Option D, $740,000, adds full cost new and site ($500,000 + $240,000) without applying the 62% good factor. Reducing the improvements to $310,000 first gives $550,000.
Good times cost, plus dirt
Multiply cost new by percent good to find what remains of the improvements, then add land. Percent good and percent depreciation add to 100%.
How to use: Use this for any cost approach question that supplies a percent good factor and a site value.
Exam Tip
Confirm whether the factor given is percent good or percent depreciation. Then check whether the question wants the improvements alone or the total.
Common Mistakes to Avoid
- -Using the depreciation percentage as if it were percent good
- -Leaving out the site value
- -Depreciating the land along with the improvements
Concept Deep Dive
Analysis
This question tests the percent-good form of the cost approach. The 62% good factor accounts for all loss, so cost new times 62% is the depreciated improvement value. Adding the supported site value gives the total.
Background Knowledge
Percent good is the complement of depreciation, so a 62% good factor means 38% total depreciation. The cost approach adds the depreciated value of the improvements to a separately supported site value.
Real-World Application
An appraiser valuing a home with dated finishes concludes from market evidence that the improvements retain 62% of current cost new. Adding the land value from comparable lot sales produces the cost approach indication.
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