In the cost approach to valuation, what does the term 'depreciation' refer to?
Correct Answer
B) The loss in value from physical deterioration, functional or external obsolescence
In the cost approach, depreciation represents the loss in value from the reproduction cost new due to physical wear and tear, functional obsolescence (outdated design), and external obsolescence (negative external influences). This depreciation is subtracted from the replacement cost to determine current value.
Why This Is the Correct Answer
Option B correctly defines depreciation in the cost approach as the loss in value due to physical deterioration, functional obsolescence, or external factors. This aligns with standard appraisal methodology recognized across Canadian provinces. Physical deterioration includes wear and tear, functional obsolescence refers to outdated design or features, and external obsolescence involves negative influences from outside the property. This comprehensive definition reflects how appraisers actually calculate depreciation when using the cost approach, subtracting these value losses from replacement cost new to determine current market value.
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