COST APPROACH PROBLEMS

# COST APPROACH PROBLEMS

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## COST APPROACH PROBLEMS

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1. COST APPROACH PROBLEMS

2. THE IMPROVEMENTS ON THE SUBJECT PROPERTY HAVE AN EFFECTIVE AGE OF 20 YEARS, REMAINING ECONOMIC LIFE OF 30 YEARS AND RCN OF \$50,000. • ESTIMATE THE CONTRIBUTORY VALUE OF THE IMPROVEMENTS.

3. Effective age 20 years Remaining life 30 years Total life 50 years • 20/50 = 0.4 = 40% Depreciation • RCN = \$ 50,000 • Depr. = \$20,000 • Contributory Value = \$30,000

4. THE SUBJECT PROPERTY HAS A BARN WHICH WOULD COST \$ 40,000 TO REPRODUCE TODAY. • EFFECTIVE AGE IS 40 YEARS AND REMAINING ECONOMIC LIFE IS 40 YEARS. • CURABLE PHYSICAL DETERIORATION IS \$10,000. • ESTIMATE THE CONTRIBUTORY VALUE OF THE BARN.

5. Effective age 40 years Remaining life 40 years Total life 80 years 40/80 = 0.5 = 50% Depreciation

6. RCN = \$40,000 LESS \$10,000 of Curable deterioration EQUALS \$30,000 LESS \$15,000 of Incurable deterioration (0.50*30,000) Contributory Value = \$ 15,000

7. THE SUBJECT PROPERTY IMPROVEMENTS INCLUDE A BARN WHICH COULD BE REPRODUCED TODAY FOR \$ 60,000. EFFECTIVE AGE IS 30 YEARS AND REMAINING ECONOMIC LIFE IS 30 YEARS. • CURABLE PHYSICAL DETERIORATION IS \$2,000 AND CURABLE FUNCTIONAL OBSOLESCENCE DUE TO A DEFICIENCY IS \$3,000. • ESTIMATE THE CONTRIBUTORY VALUE OF THE BARN.

8. Effective age 30 years Remaining life 30 years Total life 60 years 30/60 = 0.5 = 50% Depreciation

9. RCN = \$ 60,000 LESS \$ 2,000 of Curable deterioration EQUALS \$ 58,000 LESS \$ 29,000 of Incurable deterioration (0.50*58,000) EQUALS \$ 29,000 LESS \$ 3,000 of Curable functional obsolescence Contributory Value = \$ 26,000

10. YOU ESTIMATE IT WOULD COST \$30,000 TO REPLACE THE DWELLING ON THE RESIDENTIAL PROPERTY YOU ARE APPRAISING. • FROM RELIABLE MARKET DATA YOU ARE AWARE OF A SIMILAR RESIDENTIAL PROPERTY THAT RECENTLY SOLD FOR \$32,000 WITH A RCN FOR THE RESIDENCE OF \$40,000. • IF THE LAND HAS A VALUE OF \$6,000 FOR BOTH PROPERTIES, WHAT IS THE PERCENT DEPRECIATION INDICATED BY THE COMPARABLE SALE?

11. WHAT IS THE DOLLAR AMOUNT OF THE DEPRECIATION FOR THE SUBJECT PROPERTY? • WHAT IS THE ESTIMATED VALUE OF THE SUBJECT PROPERTY?

12. Market value of comparable \$ 32,000 • LESS the comparable land value \$ 6,000 • EQUALS Improvement value of \$ 26,000 • RCN of the comparable \$ 40,000 • LESS the improvement value of \$ 26,000 • EQUALS accrued depr. of \$ 14,000 or 35% of RCN

13. RCN of the subject property \$ 30,000 • LESS the estimated accrued depr. of \$ 10,500 (30000* 0.35) • EQUALS estimated contributory value of the residence \$19,500 • Contributory value of the residence \$19,500 • PLUS land value \$ 6,000 • EQUALS estimated property value of \$ 25,500