An appraiser is valuing an older Alberta property and applies the cost approach. What types of depreciation must be considered?
Correct Answer
A) Physical depreciation, functional obsolescence, and external or economic obsolescence
In the cost approach, three types of depreciation are deducted from the replacement or reproduction cost: (1) physical depreciation from wear, age, and deterioration; (2) functional obsolescence from outdated design, layout, or mechanical systems; and (3) external (economic) obsolescence from factors outside the property such as declining neighbourhood or adverse zoning changes.
Why This Is the Correct Answer
Under standard appraisal practice applied in Alberta, the cost approach requires deducting three types of depreciation: physical depreciation (wear, age, deterioration), functional obsolescence (outdated design, layout, or systems), and external/economic obsolescence (neighbourhood decline, zoning changes, economic factors). All three must be considered to arrive at an accurate value estimate under Alberta assessment standards.
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