A house that was built 10 years ago has a reproduction cost of $350,000. It has 40 years of useful life remaining. The land on which it was built is valued at $80,000. What is the value of this property using the cost approach?

Rationale

The value of this property using the cost approach is $360,000.

To determine the value of the property using the cost approach, we add the reproduction cost of the house ($350,000) to the value of the land ($80,000), resulting in a total value of $430,000. However, since the house has been depreciated for 10 years of its 50-year total useful life (20% depreciation), we need to subtract this depreciation, which is $70,000. Thus, the property value amounts to $360,000.

A ($280,000) YOUR ANSWER

This option suggests a significant depreciation of the property that does not accurately reflect the calculations based on the reproduction cost and land value. A value of $280,000 would imply a higher depreciation rate than actually incurred, given the remaining useful life of the house.

B ($499,000) YOUR ANSWER

This figure exceeds the total of the reproduction cost plus land value. Such a high valuation does not account for the necessary depreciation of the house, and thus misrepresents the market value based on the cost approach.

C ($360,000) CORRECT

This is the correct answer, calculated by adding the reproduction cost of the house ($350,000) and the land value ($80,000) to get $430,000, then subtracting the depreciation of the house, which is $70,000 (20% of the total useful life). This adjustment leads to an accurate property value of $360,000.

D ($170,500) YOUR ANSWER

This option reflects an incorrectly low valuation that does not align with the reproduction cost or the land value. Such a valuation would imply an excessive depreciation or a significant error in calculating the useful life of the property, which is not supported by the information given.

Conclusion

The cost approach values a property by considering both the reproduction cost of the structure and the value of the land, adjusted for depreciation. In this case, the accurate valuation of the property is $360,000, which reflects the proper accounting for depreciation over the house's remaining useful life. This method ensures that all contributing factors to the property's value are adequately considered.

A house that was built 10 years ago has a reproduction cost of $350,000. It has 40 years of useful life remaining. The land on which it was built is valued at $80,000. What is the value of this property using the cost approach?

The value of this property using the cost approach is $360,000.

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