The cost approach indicates $520,000 while sales comparison indicates $430,000 on a 40-year-old house. What is the most likely explanation?
Correct Answer
C) Accrued depreciation has been underestimated
Why this is correct: For a 40-year-old house, the cost approach result is highly sensitive to the estimate of accrued depreciation. A cost indication significantly higher than the sales comparison indication strongly suggests depreciation has been understated, inflating the cost value. Why the other choices are wrong: While misapplication is possible, the age of the property points directly to depreciation as the likely issue. If the market had risen, the sales comparison might be low, but the question implies the sales are current. Omitting site value would make the cost indication lower, not higher. Exam tip: A high cost approach result on an old building often flags a depreciation error.
Why This Is the Correct Answer
Why this is correct: For a 40-year-old house, the cost approach result is highly sensitive to the estimate of accrued depreciation. A cost indication significantly higher than the sales comparison indication strongly suggests depreciation has been understated, inflating the cost value. Why the other choices are wrong: While misapplication is possible, the age of the property points directly to depreciation as the likely issue. If the market had risen, the sales comparison might be low, but the question implies the sales are current. Omitting site value would make the cost indication lower, not higher. Exam tip: A high cost approach result on an old building often flags a depreciation error.
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