IACP Cost Approach & Depreciation Analysis 2 — Questions and Answers
Question 1: The quantity survey method of cost estimating is considered the most accurate because it:
- Uses only published national cost indices adjusted to local markets
- Itemizes all materials, labor, overhead, and profit for every component of construction (Correct answer)
- Applies a single cost-per-square-foot factor to the gross building area
- Estimates costs by pricing individual installed building components in place
Correct answer: Itemizes all materials, labor, overhead, and profit for every component of construction
The quantity survey method provides the highest level of detail by listing and pricing every material and labor item, making it the most accurate but most time-consuming cost approach method.
Question 2: When using the cost approach, an appraiser who estimates replacement cost rather than reproduction cost is accounting for:
- All forms of accrued depreciation including physical, functional, and external
- The cost of land as a separate component from the structure
- Functional obsolescence already by substituting modern equivalent materials (Correct answer)
- The remaining economic life of the existing structure
Correct answer: Functional obsolescence already by substituting modern equivalent materials
Replacement cost uses modern materials and current standards, so some functional obsolescence (related to outdated construction techniques or materials) is inherently captured in the lower cost estimate.
Question 3: A building has a chronological age of 20 years but has been well maintained and updated. Its effective age is estimated at 12 years. This difference indicates:
- The structure has suffered excessive deferred maintenance
- The owner's capital improvements and upkeep have extended the building's economic life (Correct answer)
- External obsolescence has reduced the property's market value
- The building's total economic life has decreased due to market conditions
Correct answer: The owner's capital improvements and upkeep have extended the building's economic life
When effective age is less than chronological age, it indicates that maintenance, renovations, or updates have kept the building in condition better than expected for its actual age.
Question 4: Which statement correctly describes 'incurable functional obsolescence' in the cost approach?
- A deficiency that can be corrected and where the cost to cure equals the value added
- Physical damage that requires rebuilding portions of the structure to correct
- A deficiency where correction is either physically impossible or economically unwarranted (Correct answer)
- Depreciation caused by factors external to the property that the owner cannot control
Correct answer: A deficiency where correction is either physically impossible or economically unwarranted
Incurable functional obsolescence refers to items that either cannot be corrected or where the cost to cure exceeds the resulting increase in value, making correction economically irrational.
Question 5: In the cost approach, entrepreneurial profit (developer's profit) is:
- Excluded because it represents speculation rather than actual construction cost
- The contractor's overhead and profit built into construction bids
- The return a developer expects for taking the risk of creating a new property (Correct answer)
- The difference between the appraised value and the assessed tax value
Correct answer: The return a developer expects for taking the risk of creating a new property
Entrepreneurial profit is the market-derived reward a developer expects for taking the risk, expertise, and time involved in creating a new property from concept to completion.
Question 6: The 'unit-in-place' method estimates construction costs by:
- Applying a cost per square foot to the total building gross area
- Pricing complete installed subsystems such as roofing, HVAC, or plumbing per unit (Correct answer)
- Adjusting a historical cost index to current market conditions
- Surveying the quantity of every material and labor unit in the building
Correct answer: Pricing complete installed subsystems such as roofing, HVAC, or plumbing per unit
The unit-in-place method estimates cost by pricing complete installed building subsystems (e.g., cost per square foot of installed roofing) rather than individual materials or the whole building at once.
Question 7: When calculating accrued depreciation using the breakdown method, an appraiser separately estimates:
- Only physical deterioration and external obsolescence
- Physical deterioration, functional obsolescence, and external obsolescence independently (Correct answer)
- Replacement cost and reproduction cost to find the difference
- Chronological age and remaining economic life using market sales
Correct answer: Physical deterioration, functional obsolescence, and external obsolescence independently
The breakdown method requires the appraiser to independently identify and estimate each form of depreciation — physical deterioration, functional obsolescence, and external obsolescence — and then sum them.
IACP Cost Approach & Depreciation Analysis 2
The quantity survey method of cost estimating is considered the most accurate because it: