RAA RAA Cost Approach & Depreciation 2 — Questions and Answers
Question 1: In the age-life method of estimating depreciation, what does 'effective age' represent?
- The year the building was originally constructed
- The age the building appears to be based on its condition and utility (Correct answer)
- The number of years remaining until the building has zero value
- The actual chronological age minus renovations
Correct answer: The age the building appears to be based on its condition and utility
Effective age reflects the apparent age of the property given its condition and maintenance, which may differ from chronological age.
Question 2: Using the age-life method, if a home has an effective age of 10 years and a total economic life of 60 years, the depreciation percentage is:
- 10%
- 16.67% (Correct answer)
- 25%
- 40%
Correct answer: 16.67%
Depreciation % = Effective Age ÷ Total Economic Life = 10 ÷ 60 = 16.67%.
Question 3: Which depreciation method provides the most detailed estimate by itemizing each component's condition and remaining life?
- Age-Life Method
- Modified Age-Life Method
- Observed Condition (Breakdown) Method (Correct answer)
- Sales Extraction Method
Correct answer: Observed Condition (Breakdown) Method
The Observed Condition (Breakdown) Method analyzes each component separately, measuring physical, functional, and external depreciation individually.
Question 4: A single-family home has replacement cost new of $250,000 and total accrued depreciation of $50,000. The site value is $75,000. What is the indicated value by the cost approach?
- $175,000
- $200,000
- $275,000 (Correct answer)
- $325,000
Correct answer: $275,000
Cost approach value = ($250,000 − $50,000) + $75,000 = $275,000.
Question 5: The cost approach is given the most weight by an RAA appraiser when:
- There are many comparable sales available
- The property is new construction or has few sales comparables (Correct answer)
- The income approach produces a much higher value
- The subject is an older property in a declining market
Correct answer: The property is new construction or has few sales comparables
The cost approach is most reliable and receives the most weight for new construction or unique properties where comparable sales are scarce.
Question 6: What is the primary purpose of estimating site value separately in the cost approach?
- To calculate property tax assessments
- Because land does not depreciate and must be valued independently before applying depreciation to improvements (Correct answer)
- To determine the highest and best use of the property
- To allocate value between building components
Correct answer: Because land does not depreciate and must be valued independently before applying depreciation to improvements
Land is not subject to depreciation; therefore, it must be valued separately and added back after depreciation is applied to the improvements.
RAA RAA Cost Approach & Depreciation 2
In the age-life method of estimating depreciation, what does 'effective age' represent?