The subject improvements have a current replacement cost new of $360,000. Accrued depreciation from all causes is $72,000, and land value is $90,000. These figures include all necessary cost components and depreciation. What is the indicated property value?
Correct Answer
B) $378,000
First deduct all accrued depreciation from improvement cost new: $360,000 − $72,000 = $288,000. Add the separate land value: $288,000 + $90,000 = $378,000. Do not omit land, add depreciation, or deduct the same loss twice.
Why This Is the Correct Answer
Option B is correct because $360,000 cost new minus $72,000 accrued depreciation leaves a depreciated improvement value of $288,000. Adding the $90,000 land value gives $288,000 + $90,000 = $378,000. This deducts depreciation once and includes the land.
Why the Other Options Are Wrong
Option A: $450,000
Option A, $450,000, results from adding cost new and land without deducting depreciation: $360,000 + $90,000 = $450,000. Accrued depreciation of $72,000 must be subtracted, giving $378,000.
Option C: $288,000
Option C, $288,000, is only the depreciated improvement value: $360,000 - $72,000 = $288,000. It omits the $90,000 land value, which must be added to reach $378,000.
Option D: $360,000
Option D, $360,000, is simply the replacement cost new of the improvements, with no depreciation deducted and no land added. The correct calculation is $360,000 - $72,000 + $90,000 = $378,000.
Cost minus loss plus land
Say it as a phrase: cost minus loss plus land. Depreciation comes off the building, and land goes on last.
How to use: Use this phrase to check the order of operations in any basic cost-approach calculation.
Exam Tip
Most wrong answers in simple cost problems come from leaving out one input. After you compute, confirm that cost new, depreciation and land each appear exactly once.
Common Mistakes to Avoid
- -Omitting land value from the final indication
- -Adding depreciation instead of subtracting it
- -Deducting depreciation from land as well as improvements
Concept Deep Dive
Analysis
This question tests the basic cost-approach formula: replacement cost new of the improvements, less accrued depreciation from all causes, plus land value. All costs and depreciation are already included, so the task is purely arithmetic in the correct order.
Background Knowledge
The cost approach estimates value as the cost of the land plus the cost of constructing the improvements, less depreciation. Depreciation from physical, functional and external causes is deducted from improvement cost new only, because land is valued separately and is not depreciated in this model.
Real-World Application
An appraiser completing the cost section of a residential report enters a supported replacement cost new, deducts the total depreciation she estimated, and adds a site value drawn from vacant land sales. The resulting figure is one indication she later reconciles with the sales comparison approach.
More Cost Approach Questions
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Previous 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?
Next Question
The current cost new of the improvements is $2,400,000, with an effective age of 18 years and a total economic life of 40 years. There are no other deductions and no salvage value. What is the depreciation indicated by the straight-line age-life method alone?