SAEE SAEE - Cost Approach and Depreciation Questions and Answers 5 — Questions and Answers
Question 1: Physical deterioration that cannot be economically corrected is classified as:
- Incurable physical deterioration (Correct answer)
- Curable physical deterioration
- Functional obsolescence
- Economic obsolescence
Correct answer: Incurable physical deterioration
Physical deterioration is incurable when the cost to cure exceeds the contributory value the cure would add.
Question 2: An appraiser uses the breakdown method to estimate depreciation. Which categories does this method analyze?
- Physical deterioration, functional obsolescence, and external obsolescence (Correct answer)
- Land depreciation, building depreciation, and site improvements
- Short-lived, long-lived, and curable items only
- Age-life ratio, market extraction, and capitalization rate
Correct answer: Physical deterioration, functional obsolescence, and external obsolescence
The breakdown method categorizes all depreciation into physical deterioration, functional obsolescence, and external (economic) obsolescence.
Question 3: If a comparable sale indicates a depreciation rate of 1.5% per year for a similar structure, an appraiser using market extraction would apply this rate to the:
- Reproduction or replacement cost of improvements (Correct answer)
- Sale price of the comparable property
- Land value of the subject property
- Assessed value of the subject improvements
Correct answer: Reproduction or replacement cost of improvements
The extracted depreciation rate is applied to the estimated reproduction or replacement cost of the subject's improvements.
Question 4: A building's effective age is less than its chronological age. This most likely indicates:
- The building has been well-maintained or renovated (Correct answer)
- The building suffers severe deferred maintenance
- The building is overimproved for the neighborhood
- The land value has increased significantly
Correct answer: The building has been well-maintained or renovated
Good maintenance or recent renovation makes a building appear newer than its actual age, resulting in an effective age below chronological age.
Question 5: Quantity survey method is the most detailed cost estimation method because it:
- Lists and prices every material, labor hour, overhead cost, and profit separately (Correct answer)
- Prices only major structural components
- Applies a single cost multiplier to the gross building area
- Uses only recent comparable new construction sales
Correct answer: Lists and prices every material, labor hour, overhead cost, and profit separately
The quantity survey method provides the most accurate estimate by tallying every individual cost element of construction.
Question 6: When the cost approach is most applicable to a new, special-purpose property with no comparable sales, an appraiser relies on it primarily because:
- There is little or no depreciation and no market data to support other approaches (Correct answer)
- The income approach always produces a lower value for special-purpose properties
- Land values are excluded from the final value estimate
- Functional obsolescence is always zero for new construction
Correct answer: There is little or no depreciation and no market data to support other approaches
For new special-purpose properties, the cost approach is most reliable because depreciation is minimal and comparable sales are unavailable.
Question 7: A residential property has a replacement cost of $200,000, accrued depreciation of $40,000, and an estimated land value of $60,000. What is the indicated value by the cost approach?
- $220,000 (Correct answer)
- $200,000
- $240,000
- $160,000
Correct answer: $220,000
Cost approach value = replacement cost − depreciation + land value = $200,000 − $40,000 + $60,000 = $220,000.
SAEE SAEE - Cost Approach and Depreciation Questions and Answers 5
Physical deterioration that cannot be economically corrected is classified as: