A home that cost $250,000 to build has a land value of $60,000. The home suffers from $70,000 in physical depreciation and $20,000 of incurable obsolescence. The replacement cost of the home is 7 percent more than its original cost. What is the current value of the property using the cost approach?

Rationale

The current value of the property using the cost approach is $248,600.

To calculate the current value of the property using the cost approach, we start with the replacement cost of the home, which is 7% more than the original cost of $250,000. This gives us a replacement cost of $267,500. We then subtract both the physical depreciation of $70,000 and the incurable obsolescence of $20,000, leading to a current value of $248,600.

A ($250,000) YOUR ANSWER

This option represents the original cost of building the home without accounting for the depreciation and obsolescence that have occurred over time. As such, it does not reflect the current value of the property, which must consider these factors.

B ($260,000) YOUR ANSWER

This value does not accurately reflect the calculations needed for the current property value. It fails to account for the total depreciation and obsolescence, which amount to $90,000 when subtracted from the adjusted replacement cost of $267,500.

C ($248,600) CORRECT

This is the correct answer. After calculating the replacement cost at 7% more than the original cost, which totals $267,500, and subtracting the physical depreciation of $70,000 and incurable obsolescence of $20,000, we arrive at a current property value of $248,600.

D ($260,900) YOUR ANSWER

This option incorrectly reflects the current value of the property. It does not consider the full extent of depreciation and obsolescence that should be deducted from the calculated replacement cost, leading to an inflated value that does not represent the actual worth of the property.

Conclusion

Using the cost approach, the value of the property is determined by considering the replacement cost, depreciation, and obsolescence. After accurately calculating these factors, the resulting current value of $248,600 reflects a realistic assessment of the property's worth in the market. This methodology is crucial for property evaluations and investment decisions.

A home that cost $250,000 to build has a land value of $60,000. The home suffers from $70,000 in physical depreciation and $20,000 of incurable obsolescence. The replacement cost of the home is 7 percent more than its original cost. What is the current value of the property using the cost approach?

The current value of the property using the cost approach is $248,600.

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