SAEE Cost Approach and Depreciation 2 — Questions and Answers
Question 1: In the cost approach, which formula correctly states the value indication?
- Land value + (cost new - depreciation) (Correct answer)
- Cost new + land value - appreciation
- Replacement cost + accrued depreciation
- Gross income x cap rate
Correct answer: Land value + (cost new - depreciation)
Cost approach value equals land value plus the depreciated cost of improvements (cost new minus accrued depreciation).
Question 2: Reproduction cost differs from replacement cost in that reproduction cost estimates the cost to build:
- A functionally equivalent substitute
- An exact replica using the same materials and design (Correct answer)
- Only the land improvements
- The structure at a future date
Correct answer: An exact replica using the same materials and design
Reproduction cost is the cost to create an exact duplicate, while replacement cost builds an equivalent-utility substitute with modern materials.
Question 3: Which cost-estimating method applies a price per square foot or cubic foot derived from similar buildings?
- Quantity survey method
- Unit-in-place method
- Comparative-unit method (Correct answer)
- Index method
Correct answer: Comparative-unit method
The comparative-unit method applies a known cost per unit of area or volume from comparable structures.
Question 4: An appraiser uses the original construction cost and adjusts it with a published multiplier. This is the:
- Index method (Correct answer)
- Quantity survey method
- Unit-in-place method
- Sales comparison method
Correct answer: Index method
The index method updates a known historical cost using a current cost index ratio.
Question 5: The cost approach is generally considered MOST reliable for:
- Older homes with significant wear
- Special-purpose or newly built properties (Correct answer)
- Vacant agricultural land
- Income-producing apartment complexes
Correct answer: Special-purpose or newly built properties
The cost approach is most reliable for new construction and special-purpose properties that lack comparable sales.
Question 6: Which item is NOT typically included in direct (hard) costs?
- Building materials
- Labor for construction
- Developer profit and financing (Correct answer)
- Contractor's on-site equipment
Correct answer: Developer profit and financing
Developer profit and financing are indirect (soft) costs, not direct construction costs.
Question 7: Entrepreneurial incentive in the cost approach represents:
- The expected reward motivating a developer to undertake a project (Correct answer)
- A penalty for construction delays
- Depreciation of the land
- The broker's commission
Correct answer: The expected reward motivating a developer to undertake a project
Entrepreneurial incentive is the anticipated profit that motivates a developer to build.
SAEE Cost Approach and Depreciation 2
In the cost approach, which formula correctly states the value indication?