An appraiser is using the cost approach to value a custom-built heritage home. The reproduction cost new is estimated at $850,000, the land value is $300,000, and total depreciation is calculated at $180,000. What is the property's estimated value using this approach?
Correct Answer
A) $970,000
The cost approach formula is: Property Value = (Reproduction Cost New - Depreciation) + Land Value. Therefore: ($850,000 - $180,000) + $300,000 = $670,000 + $300,000 = $970,000. The land value is added separately as land doesn't depreciate.
Why This Is the Correct Answer
Option A correctly applies the cost approach formula: Property Value = (Reproduction Cost New - Depreciation) + Land Value. The calculation is ($850,000 - $180,000) + $300,000 = $970,000. This follows standard appraisal methodology where the depreciated building value is combined with the undepreciated land value. The land component is added separately because land is considered to have indefinite economic life and doesn't suffer from physical deterioration like improvements do.
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An appraiser is valuing a 15-unit apartment building. The building generates $180,000 in annual rental income with operating expenses of $60,000. If the capitalization rate for similar properties is 8%, what is the estimated value using the income approach?