Direct improvement costs are $315,000, indirect costs are $47,000 and an additional incentive is $36,000, with no overlap among them. Straight-line depreciation is 12/60 of their total, with no other loss, and the site value is $198,000. What is the indicated value by the cost approach?
Correct Answer
C) $516,400
(315000+47000+36000)×(1−12÷60)+198000 = 516400. Common errors: leaving out the site value gives $318,400; leaving out the incentive gives $487,600; not deducting the 12/60 depreciation gives $596,000.
Why This Is the Correct Answer
Option C is correct because total cost new is $315,000 + $47,000 + $36,000 = $398,000. Applying 1 - 12/60 = 0.80 gives $318,400, and adding the $198,000 site gives $516,400.
Why the Other Options Are Wrong
Option A: $318,400
Option A, $318,400, leaves out the site value: ($315,000 + $47,000 + $36,000) x 0.80 = $318,400. Adding the $198,000 site gives $516,400.
Option B: $487,600
Option B, $487,600, leaves out the incentive: ($315,000 + $47,000) x 0.80 + $198,000 = $487,600. Including the $36,000 incentive gives $398,000 x 0.80 + $198,000 = $516,400.
Option D: $596,000
Option D, $596,000, does not deduct the 12/60 depreciation: $398,000 + $198,000 = $596,000. Applying the 20% depreciation gives $318,400 + $198,000 = $516,400.
Build It Up, Wear It Down
First build up full cost new from all three layers, then wear it down with the age-life fraction, then set it on the land.
How to use: Use this order for multi-step cost questions.
Exam Tip
Apply the depreciation fraction to the full cost total, not to just part of it, and not to the site.
Common Mistakes to Avoid
- -Leaving the incentive out of cost new
- -Applying depreciation to the site value
- -Forgetting to deduct depreciation
Concept Deep Dive
Analysis
This question combines full cost new with an age-life fraction and a site addition. Sum the direct, indirect and incentive costs, apply 12/60 depreciation to that total, then add the site.
Background Knowledge
Full economic cost includes direct costs, indirect costs and market-supported entrepreneurial incentive. Age-life depreciation is applied to that full cost new, and the site is added afterward because land does not depreciate.
Real-World Application
An appraiser values a newer house by adding hard costs, soft costs and a builder's incentive. She applies a modest age-life depreciation to the total and adds land value from residential lot sales.
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?
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?
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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?
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