Improvement cost new is $520,000. Separately supported improvement depreciation deductions of $95,000 are expressly nonoverlapping and not already excluded from cost new. Add supported site value of $110,000, already reflecting any site losses. What total indicated value results?
Correct Answer
B) $535,000
520000−(95000)+110000 = 535000. Common errors: leaving out the site value gives $425,000; not deducting the depreciation gives $630,000; adding the depreciation instead of deducting it gives $725,000.
Why This Is the Correct Answer
Option B is correct because $520,000 - $95,000 + $110,000 = $535,000. Depreciation is subtracted from improvement cost new, and site value, which already reflects any site losses, is added. That gives the cost approach indication.
Why the Other Options Are Wrong
Option A: $425,000
Option A is wrong because $425,000 leaves out the site value: $520,000 - $95,000 = $425,000. Adding the $110,000 site gives $535,000.
Option C: $630,000
Option C is wrong because $630,000 does not deduct the depreciation: $520,000 + $110,000 = $630,000. Subtracting the $95,000 gives $535,000.
Option D: $725,000
Option D is wrong because $725,000 adds the depreciation instead of deducting it: $520,000 + $95,000 + $110,000 = $725,000. Depreciation reduces value, giving $535,000.
Cost minus loss plus land
Cost new, minus depreciation, plus site value equals the cost approach indication.
How to use: Use this for any question that asks for a total value by the cost approach.
Exam Tip
Confirm whether the question asks for the depreciated improvements only or the total including site value.
Common Mistakes to Avoid
- -Forgetting to add site value
- -Adding depreciation instead of subtracting it
- -Depreciating the site value
Concept Deep Dive
Analysis
This question tests the basic cost approach formula: cost new minus depreciation plus site value. Here $520,000 - $95,000 = $425,000 depreciated improvements, plus $110,000 site value. The total indicated value is $535,000.
Background Knowledge
The cost approach estimates value as the cost new of the improvements, less accrued depreciation, plus site value. Site value is estimated separately as though vacant and is not depreciated.
Real-World Application
An appraiser estimates a home's cost new at $520,000, total depreciation at $95,000 and site value at $110,000 from lot sales. The cost approach indicates $535,000, which the appraiser reconciles with the other approaches.
More Cost Approach Questions
Why can equivalent-utility replacement cost be useful for an obsolete improvement?
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What best supports a claimed loss from a bathroom-layout deficiency?
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Direct costs including contractor overhead/profit are $420,000. Additional indirect costs are $65,000 and separately supported entrepreneurial incentive $55,000, not already counted. Land is separate and excluded from this question. What improvement cost new results?
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