The subject improvements have hard costs of $300,000 and soft costs of $45,000. These amounts do not overlap and include all required improvement costs. Total depreciation is estimated at 20% of their sum, and the site is valued at $175,000. What value does the cost approach indicate?
Correct Answer
C) $451,000
(300000+45000)×0.80+175000=451000. Use the full cost buildup and apply the loss to that total. Common errors: leaving out the site value gives $276,000; leaving out the soft costs gives $415,000; not applying the 20% loss gives $520,000.
Why This Is the Correct Answer
Option C is correct because ($300,000 + $45,000) x 0.80 + $175,000 = $451,000. Hard and soft costs together form full improvement cost, the 20% loss is applied to that sum, and site value is added last. Each step uses the stated base.
Why the Other Options Are Wrong
Option A: $276,000
Option A is wrong because $276,000 leaves out the site value: ($300,000 + $45,000) x 0.80 = $276,000. Adding the $175,000 site gives $451,000.
Option B: $415,000
Option B is wrong because $415,000 leaves out the soft costs: $300,000 x 0.80 + $175,000 = $415,000. Soft costs are part of full cost, so the base is $345,000 and the total is $451,000.
Option D: $520,000
Option D is wrong because $520,000 does not apply the 20% loss: $300,000 + $45,000 + $175,000 = $520,000. Applying 80% good to the $345,000 improvement cost gives $451,000.
Hard plus soft, then depreciate
Add hard and soft costs first, apply percent good to that total, and add site value at the end.
How to use: Use this when a cost question lists separate hard and soft costs with a depreciation percentage.
Exam Tip
Apply the depreciation to improvement cost, not to site value, and make sure soft costs are in the base.
Common Mistakes to Avoid
- -Omitting soft costs from the improvement base
- -Applying depreciation to site value
- -Forgetting to add site value at the end
Concept Deep Dive
Analysis
This question tests a cost buildup that combines hard and soft costs before applying depreciation, then adds site value. Total cost is $300,000 + $45,000 = $345,000, and 80% of that is $276,000. Adding the $175,000 site gives $451,000.
Background Knowledge
Full economic cost includes direct (hard) costs, indirect (soft) costs and market-supported entrepreneurial profit. Depreciation is applied to the improvement cost, and percent good is the complement of the depreciation percentage.
Real-World Application
An appraiser totals $300,000 of construction costs and $45,000 of fees, permits and financing for a small building. After 20% depreciation and adding $175,000 for the site, the cost approach indicates $451,000.
More Cost Approach Questions
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