 Question:

# When an appraiser values a property under the cost approach, they add the value of the site to the depreciated cost new of improvements. If the value of a site is \$150,000, the cost to build a new house is \$300,000, the cost to build a new garage is\$75,000, and the value of site improvements such as landscaping and the driveway are \$75,000, what is the final value of the property under the cost approach when a 20% physical depreciation factor is applied?

A \$525,000.
Explaination

The cost approach requires the appraiser to adjust the house and garage costs, known as the “cost new” of constructed improvements, by a depreciation factor. Thus: \$300,000 (house) + \$75,000 (garage) = \$375,000 x 0.2 (20% depreciation) = \$75,000. Then subtract the depreciation amount from the cost new. \$375,000 (cost new) - \$75,000 (accrued depreciation) = \$300,000 (depreciated cost new). Finally, add the various amounts: \$150,000 (site) + \$300,000 (depreciated construction costs) + \$75,000 (site improvements) = \$525,000.