SAEE - Cost Approach and Depreciation Questions and Answers Flashcards

In the cost approach, reproduction cost differs from replacement cost because reproduction cost reflects:

Answer: An exact replica of the existing structure using identical materials

Reproduction cost estimates the cost to construct an exact duplicate of the subject using the same materials, design, and construction methods.

Which scenario best illustrates curable functional obsolescence due to a deficiency?

Answer: A house lacking central air conditioning in a market where it is standard

A missing feature that the market expects, like central air conditioning, represents a curable functional deficiency that can be economically added.

The quantity survey method of cost estimation is considered the most detailed because it:

Answer: Itemizes every material, labor hour, and overhead cost required for construction

The quantity survey method prices out each individual component of construction including materials, labor, equipment, and overhead for the most detailed estimate.

An office building was constructed 10 years ago at a cost of $2,000,000. The cost index at time of construction was 150 and the current index is 195. What is the current reproduction cost?

Answer: $2,600,000

Current cost equals original cost multiplied by the ratio of current to historical index: $2,000,000 × (195/150) = $2,600,000.

Which form of depreciation would most likely result from a change in zoning that prohibits the current use of a property?

Answer: External obsolescence

A zoning change is an external factor outside the owner's control that negatively impacts value, making it external obsolescence.

When applying the cost approach, entrepreneurial profit is included because it represents:

Answer: The developer's expected compensation for risk, coordination, and time invested

Entrepreneurial profit compensates the developer for the risk, effort, and time required to complete a development project.