An appraiser is valuing a 40-year-old office building using the cost approach. The land is worth $500,000, replacement cost is $2,000,000, but the building has functional obsolescence due to outdated electrical systems valued at $150,000 and physical depreciation of $300,000. What is the estimated value?

Q: What is the correct answer to: An appraiser is valuing a 40-year-old office building using the cost approach. The land is worth $500,000, replacement cost is $2,000,000, but the building has functional obsolescence due to outdated electrical systems valued at $150,000 and physical depreciation of $300,000. What is the estimated value?

The correct answer is $2,050,000. Option B correctly applies the cost approach formula: Land Value + Replacement Cost - All Depreciation = Property Value. The calculation is $500,000 (land) + $2,000,000 (replacement cost) - $300,000 (physical depreciation) - $150,000 (functional obsolescence) = $2,050,000. This follows standard appraisal principles where all forms of depreciation must be subtracted from the sum of land value and replacement cost to arrive at the final estimated value.

Q: What background knowledge is needed for this Property Valuation question?

The cost approach is one of three primary valuation methods in real estate appraisal, alongside the sales comparison and income approaches. Under Canadian appraisal standards and provincial regulations, appraisers must consider depreciation in three forms: physical deterioration (wear and tear), functional obsolescence (outdated features), and external obsolescence (outside factors). The cost approach formula is: Land Value + Replacement/Reproduction Cost - Total Depreciation = Property Value. This method is particularly reliable for newer properties or unique buildings where comparable sales are scarce. Provincial real estate legislation requires accurate valuations for various transactions and regulatory compliance.

Q: What is a good way to remember the answer to this Property Valuation question?

Think of building a house: you need LAND + BUILD (replacement cost) - MINUS (all problems). Like buying ingredients for a recipe - you start with the land (your kitchen), add the building cost (ingredients), then subtract everything wrong with it (spoiled ingredients). You must subtract ALL the problems: physical wear AND functional issues. When you see cost approach questions, immediately identify: LAND value (add), BUILD cost (add), then find ALL depreciation types to MINUS. Don't forget any depreciation category - physical, functional, or external obsolescence must all be subtracted.

Q: What exam tip applies to this Property Valuation question?

For cost approach questions, write the formula first: Land + Replacement Cost - All Depreciation. Identify each component, ensure you subtract ALL depreciation types mentioned, then calculate step by step to avoid arithmetic errors.

Q: How does this Property Valuation concept apply in real world practice?

A real estate agent is helping a client evaluate an older commercial property for purchase. The building has good bones but needs electrical upgrades and shows wear from decades of use. Using the cost approach, the agent explains that while the land and replacement cost provide a baseline, the outdated electrical system (functional obsolescence) and general wear (physical depreciation) significantly reduce the property's value. This analysis helps the client make an informed offer and budget for necessary improvements, demonstrating how depreciation factors directly impact investment decisions.

Question

Property ValuationCost ApproachHARD

An appraiser is valuing a 40-year-old office building using the cost approach. The land is worth $500,000, replacement cost is $2,000,000, but the building has functional obsolescence due to outdated electrical systems valued at $150,000 and physical depreciation of $300,000. What is the estimated value?

Answer Options

A

$1,850,000

B

$2,050,000

C

$2,500,000

D

$2,200,000