An appraiser is valuing a 40-year-old Los Angeles apartment building using the cost approach. Replacement cost new (RCN) = $3,200,000. Physical deterioration: curable deferred maintenance = $80,000; incurable short-lived items = $120,000; incurable long-lived items = $200,000. Functional obsolescence (superadequacy) = $60,000. External obsolescence = $160,000. Land value = $2,400,000. What is the indicated value via the cost approach?
Correct Answer
A) $4,900,000
The cost approach value is calculated as: RCN ($3,200,000) minus total depreciation, plus land value. Total depreciation = physical deterioration ($80,000 + $120,000 + $200,000 = $400,000) + functional obsolescence ($60,000) + external obsolescence ($160,000) = $620,000. Depreciated improvement value = $3,200,000 − $620,000 = $2,580,000. Indicated value = $2,580,000 + $2,400,000 (land) = $4,980,000. This is consistent with the Appraisal Institute's cost approach framework, which deducts all three forms of depreciation from RCN before adding land value.
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