California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
An appraiser is using the cost approach on a property. The reproduction cost of the improvements is $400,000, total accrued depreciation is estimated at $80,000, and the land value is $100,000. What is the indicated value of the property?
- A$420,000
- B$480,000
- C$380,000
- D$320,000
Show answer & explanationAnswer & explanation
Correct answer: A. $420,000
Cost Approach: Value = Land Value + (Reproduction Cost − Depreciation) = $100,000 + ($400,000 − $80,000) = $100,000 + $320,000 = $420,000.
Why the other options are wrong
- B. This fails to subtract depreciation from reproduction cost.
- C. This incorrectly subtracts depreciation twice.
- D. This omits adding the land value to depreciated improvement cost.
Cost Approach to Value
An appraisal method that estimates value by adding the land value to the depreciated cost of improvements (reproduction/replacement cost minus accrued depreciation).
- Formula: Value = Land Value + (Cost New − Depreciation)
- Most reliable for new construction or special-purpose properties
- Requires separate land valuation, typically via sales comparison
Memory trick: Build it, wear it down, add the dirt!