In the cost approach, what is the third step?

In the cost approach, what is the third step?

• A. Estimate the replacement cost of the building
• B. Add value of site to total depreciation
• C. Estimate the accrued depreciation of the building
• D. Estimate the total depreciation cost of building

Answer: (C)

In the cost approach, you start by estimating what it would cost to replace the building, then you determine how much value has been lost due to wear, obsolescence, and other factors. The third step is to estimate the accrued depreciation of the building, because this depreciation must be subtracted from the replacement cost to reflect the building’s current value. After that, you add the value of the site to the depreciated building value to arrive at the total property value. The other options don’t fit the typical sequence: replacement cost is done first, depreciation isn’t added to the depreciation total as a separate step, and “total depreciation cost” isn’t used as the third step in this process.

In the cost approach, you start by estimating what it would cost to replace the building, then you determine how much value has been lost due to wear, obsolescence, and other factors. The third step is to estimate the accrued depreciation of the building, because this depreciation must be subtracted from the replacement cost to reflect the building’s current value. After that, you add the value of the site to the depreciated building value to arrive at the total property value. The other options don’t fit the typical sequence: replacement cost is done first, depreciation isn’t added to the depreciation total as a separate step, and “total depreciation cost” isn’t used as the third step in this process.