CGA Cost Approach 2 — Questions and Answers
Question 1: When applying the cost approach, which type of depreciation arises from factors external to the property, such as proximity to a nuisance?
- Physical deterioration
- Functional obsolescence
- External obsolescence (Correct answer)
- Economic depreciation
Correct answer: External obsolescence
External obsolescence stems from factors outside the property itself, like nearby industrial nuisances or neighborhood decline, and is generally incurable.
Question 2: An appraiser is estimating the cost of a building using the quantity survey method. What does this method involve?
- Applying a cost-per-square-foot multiplier to total building area
- Estimating costs for each component, trade, and material separately (Correct answer)
- Comparing the subject to recent sales of similar new construction
- Applying local cost index factors to national average costs
Correct answer: Estimating costs for each component, trade, and material separately
The quantity survey method is the most detailed and accurate cost estimating technique, breaking down every component, labor, and material cost individually.
Question 3: Which statement best describes the 'unit-in-place' cost estimating method?
- Costs are estimated by multiplying total square footage by a unit cost
- Costs are estimated per installed unit of each building component (Correct answer)
- Costs are derived from published cost manuals adjusted by local indices
- Costs are estimated based on comparable new building sales
Correct answer: Costs are estimated per installed unit of each building component
The unit-in-place method estimates costs by applying a cost per installed unit (e.g., cost per square foot of roofing installed) for each building component.
Question 4: A 20-year-old warehouse has an effective age of 10 years due to excellent maintenance. Its total economic life is estimated at 50 years. What is the accrued depreciation percentage?
- 40%
- 20% (Correct answer)
- 60%
- 10%
Correct answer: 20%
Depreciation = Effective Age / Total Economic Life = 10/50 = 20%; effective age, not actual age, is used in this calculation.
Question 5: In the cost approach, 'entrepreneurial profit' (also called entrepreneurial incentive) represents:
- The profit a builder earns from selling a completed project above its cost
- The return required to attract a developer to undertake a project (Correct answer)
- The difference between market value and assessed value
- The income generated from managing the construction process
Correct answer: The return required to attract a developer to undertake a project
Entrepreneurial profit (incentive) is the return required to motivate a developer to undertake a project and accept the risks involved.
Question 6: Which type of functional obsolescence is caused by a superadequacy in a building's improvements?
- Curable functional obsolescence from a deficiency
- Incurable functional obsolescence from an excess (Correct answer)
- External obsolescence from market oversupply
- Physical deterioration from deferred maintenance
Correct answer: Incurable functional obsolescence from an excess
A superadequacy (e.g., over-improvement like an oversized heating system) causes incurable functional obsolescence because the cost to cure exceeds the value added.
Question 7: Reproduction cost and replacement cost are both used in the cost approach. What is the key distinction?
- Reproduction cost uses current materials; replacement cost uses original materials
- Reproduction cost replicates the exact structure; replacement cost builds a modern equivalent (Correct answer)
- Replacement cost is always higher than reproduction cost
- Reproduction cost excludes land; replacement cost includes land value
Correct answer: Reproduction cost replicates the exact structure; replacement cost builds a modern equivalent
Reproduction cost is the cost to build an exact replica using original materials and methods, while replacement cost uses modern materials and techniques for an equally functional building.
CGA Cost Approach 2
When applying the cost approach, which type of depreciation arises from factors external to the property, such as proximity to a nuisance?