In the cost approach, what is the fifth step?

In the cost approach, what is the fifth step?

• A. Add value of site to total depreciation to equal market value
• B. Subtract depreciation from site value
• C. Subtract site value from depreciation
• D. Multiply site value by depreciation

Answer: (A)

In the cost approach, you determine value by combining the land value with the depreciated value of the improvements. After estimating the replacement cost of the building and subtracting depreciation to get the depreciation-adjusted value of the improvements, you add that to the site (land) value to arrive at the total market value. This is why the fifth step is to add the value of the site to the depreciation-adjusted value of the improvements to obtain market value. The other options don’t reflect this process: depreciation is applied to the improvements, not the land, and you don’t multiply or subtract the land value in this final step.

In the cost approach, you determine value by combining the land value with the depreciated value of the improvements. After estimating the replacement cost of the building and subtracting depreciation to get the depreciation-adjusted value of the improvements, you add that to the site (land) value to arrive at the total market value. This is why the fifth step is to add the value of the site to the depreciation-adjusted value of the improvements to obtain market value. The other options don’t reflect this process: depreciation is applied to the improvements, not the land, and you don’t multiply or subtract the land value in this final step.