Cost Approach Review Questions PDF

**1. The cost approach is premised primarily on the principle of \_\_\_\_\_\_\_\_\_\_, which states that an informed buyer will not pay more to build a property than the cost of a similar property with equal utility.**\ A. Supply and demand\ B. Anticipation\ C. **Substitution**\ D. Contribution\ **R...

**1. The cost approach is premised primarily on the principle of \_\_\_\_\_\_\_\_\_\_, which states that an informed buyer will not pay more to build a property than the cost of a similar property with equal utility.**\ A. Supply and demand\ B. Anticipation\ C. **Substitution**\ D. Contribution\ **Reason**: The principle of substitution states that a buyer will not pay more for a property if there is an equivalent substitute available for less. **2. Costs that occur on the construction site are considered \_\_\_\_\_\_\_\_\_\_ costs.**\ A. Indirect\ B. **Direct**\ C. Soft\ D. Overhead\ **Reason**: Direct costs are those costs that are directly associated with construction activities on the site, such as labor and materials. **3. The first step in the cost approach is to \_\_\_\_\_\_\_\_\_\_.**\ A. **Estimate the land (site) value as if vacant and available for development to its highest and best use**\ B. Determine the cost of constructing the building, considering modern materials and current construction practices\ C. Calculate the amount of depreciation accumulated over time, accounting for physical, functional, and external factors\ D. Estimate the income that could be generated by the property, including rental income and other potential revenue sources\ **Reason**: In the cost approach, the first step is to estimate the land (site) value as if vacant and available for development to its highest and best use. **4. Building A contains 10,000 square feet and is 130\' x 100\'. Building B contains 10,000 square feet and is 50\' x 200\'. Will it cost more to build Building A or Building B?**\ A. Building A\ B. **Building B**\ C. Costs will be equal\ D. Cannot determine from the given information\ **Reason**: Building A perimeter = 100 + I 00 + 100 + I 00 = 400 liner feet. Building **B** = 50 + 200 + 50 + 200 = 500 linear feet ***Building B, because as it has more linear feet compared to Building A.*** **5. Architectural fees, insurance, and title expenses are considered \_\_\_\_\_\_\_\_\_\_ and are sometimes called soft costs.**\ A. Hard costs\ B. **Indirect costs**\ C. Development costs\ D. Operational costs\ **Reason**: Indirect costs, also called soft costs, include expenses such as architectural fees, insurance, and title expenses. **6. \_\_\_\_\_\_\_\_\_\_ is the cost of producing an exact replica of a building or improvement.**\ A. Replacement cost\ B. **Reproduction cost**\ C. Reconstruction cost\ D. Renovation cost\ **Reason**: Reproduction cost refers to the cost of constructing an exact replica, using the same materials and design as the original building. **7. \_\_\_\_\_\_\_\_\_\_ is the cost of producing a building or improvement using modern methods and materials with the same utility.**\ A. **Replacement cost**\ B. Reproduction cost\ C. Renovation cost\ D. Depreciated cost\ **Reason**: Replacement cost is the cost of constructing a building or improvement with the same utility but using modern methods and materials. **8. Building A was constructed 20 years ago at a cost of \$400,000. The index 20 years ago was 200, and the current index is 350. The reproduction cost new for Building A would be \$\_\_\_\_\_\_\_\_.**\ A. \$700,000\ B. **\$700,000**\ C. \$500,000\ D. \$600,000\ **Reason**: The reproduction cost is calculated by multiplying the original cost by the ratio of the current index to the index 20 years ago: \$400,000 \* (350/200) = \$700,000. 350/200 = 1.75; 1.75 x \$400,000 = \$700,000. Reproduction cost new for Building A would be ***\$700,000.*** **9. Cost components such as the floor or roofing are considered \_\_\_\_\_\_\_\_\_\_ costs and are expressed as cost per square foot.**\ A. Soft\ B. **Direct**\ C. Variable\ D. Material\ **Reason**: Direct costs include specific cost components like flooring or roofing and are often measured on a per square foot basis. **10. The easiest, fastest, and most widely used method of estimating cost is the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ method.**\ A. Quantity survey\ B. **Comparative-unit**\ C. Unit-in-place\ D. Historical data\ **Reason**: The comparative-unit method is the easiest, fastest, and most widely used method of estimating costs by applying a cost per unit of area or volume. **11. Which of the following is a desirable feature of a cost manual?**\ A. Applicable to most structure types\ B. Based on actual costs\ C. Suitable for computerization\ D. **All of the above**\ **Reason**: A good cost manual should be applicable to most structure types, based on real-world costs, and adaptable for computerization to facilitate easy usage and updates. **12. The difference between the market value of an improvement and its cost at the time of appraisal is termed \_\_\_\_\_\_\_\_\_\_.**\ A. Equity\ B. Residual value\ C. **Depreciation**\ D. Capital gain\ **Reason**: Depreciation represents the difference between the market value of an improvement and its original cost, reflecting the loss in value over time due to factors such as wear and obsolescence. **The five methods of measuring depreciation are:**\ A. Market analysis method, Replacement value method, Comparative analysis method, Residual assessment method, Functional utility method\ B. **Sales comparison method, Capitalization of income method, Economic age-life method, Modified economic age-life method, Observed condition (breakdown) method**\ C. Income estimation method, Utility-based assessment, Market replacement approach, Cost assessment, Economic viability approach\ D. Cost-benefit analysis, Income valuation method, Replacement and reproduction method, Asset depreciation approach, Modified market value approach\ **Reason**: The five common methods of measuring depreciation are sales comparison, capitalization of income, economic age-life, modified economic age-life, and observed condition (breakdown) methods, each providing a different way to estimate depreciation for property valuation. **14. Property B sold for \$180,000 with an estimated land value of \$80,000. The RCN for the improvement is \$200,000. Depreciation is \_\_\_\_\_\_\_ percent.**\ A. **50%**\ B. 40%\ C. 25%\ D. 30%\ **Reason**: Depreciation is calculated as (RCN−(Market Value − Land Value))/RCN \* 100, which equals (200,000−(180,000−80,000))/200,000 \* 100 = 50%. **15. Curable physical deterioration is measured by \_\_\_\_\_\_\_\_\_\_.**\ A. Cost to replace the entire structure\ B. Income lost due to deterioration\ C. **The cost to cure the defect**\ D. The market rate of depreciation\ **Reason**: Curable physical deterioration is measured by the cost to cure or repair the defect, as it refers to deficiencies that are economically feasible to correct. **16. \_\_\_\_\_\_\_\_\_\_ obsolescence is a loss in value due to a deficiency, modernization, or super adequacy within the structure.**\ A. Physical\ B. **Functional**\ C. Economic\ D. External\ **Reason**: Functional obsolescence refers to the loss in value caused by design deficiencies, outdated features, or superadequacies, which make a structure less desirable. **17. \_\_\_\_\_\_\_\_\_\_\_ obsolescence is a loss in value resulting from a decrease in utility and desirability caused by factors outside the property\'s boundaries.**\ A. Physical\ B. Functional\ C. **External**\ D. Economic\ **Reason**: External obsolescence refers to the loss in value due to changes or negative influences outside the property, such as a busy street or nearby industrial development. **18. Incurable physical deterioration is measured by the \_\_\_\_\_\_\_\_\_\_\_.**\ A. Cost to cure the defect\ B. Estimated market impact\ C. **Remaining useful life**\ D. Depreciation allowance\ **Reason**: Incurable physical deterioration is measured by estimating the impact on the value based on the remaining useful life of the components that cannot be economically repaired. **19. If a depreciation table started at 0 percent and went to 40 percent, a percent good table would start at \_\_\_\_\_\_\_ and go to \_\_\_\_\_\_\_.**\ A. 40% to 0%\ B. **100% to 60%**\ C. 50% to 10%\ D. 80% to 40%\ **Reason**: A percent good table represents the remaining value, so it starts at 100% when the property is new and decreases to 60% when depreciation reaches 40%. **20. Which method of estimating depreciation is the most detailed? Its use is required in the writing of demonstration appraisal reports.**\ A. Economic age-life method\ B. Modified economic age-life method\ C. Sales comparison method\ D. **Observed condition (breakdown) method**\ **Reason**: The observed condition (breakdown) method is the most detailed and is often required for demonstration appraisal reports due to its comprehensive analysis of individual depreciation components. **21. An item classified as a short-lived item has a cost new of \$5,000. Its actual age is 5 years, and its total useful life is 20 years. The dollar amount of depreciation would be \_\_\_\_\_\_\_\_.**\ A. \$1,000\ B. **\$1,250**\ C. \$1,500\ D. \$2,000\ **Reason**: The depreciation is calculated by dividing the cost by the useful life and multiplying by the actual age: (\$5,000 / 20) \* 5 = \$1,250. **22. A two-story residence has only one bath, which is located on the second floor. If a second bath had been included on the first floor when the residence was originally constructed, the RCN would be \$11,500. The cost to install (cure) the second bath today would be \$13,500.** **The amount of functional obsolescence would be \_\_\_\_\_\_\_\_.** A. \$2,000\ B. **\$2,000**\ C. \$11,500\ D. \$13,500\ **Reason**: RCN would be \$11,500. The cost to install (cure) the second bath today would be \$13,500. Cost to Cure - Cost if installed New= \$13,500 - \$11,500 = \$2,000 The amount of functional obsolescence would be ***\$2,000.*** **23. A residence is located on a street that has become a very busy thoroughfare. It rents for \$800 per month. Residences not located on the busy street rent for \$825 per month. The ORM for this area is 150, and the land-to-building ratio is 1:4. The indicated amount of external obsolescence is \_\_\_\_\_\_\_\_.**\ A. \$3,750\ B. \$3,000\ C. **\$3,750**\ D. \$4,125\ **Reason**: Rent loss due to busy street= \$825 - \$800 = \$25/month ORM x Rent loss= 150 x \$25 = \$3,750. Land to building ratio= 1 :4 = 0.80 x \$3750 = \$3,000 The indicated amount of external obsolescence is ***\$3,000.*** **24. A residence has an RCN of \$200,000. Items classified as curable physical deterioration have an RCN of \$10,000 and a cost to cure of \$12,000. Incurable physical deterioration (short-lived items) have an RCN of \$40,000 and a depreciation amount of \$18,000. The actual age for the residence is 6 years, and the total useful life is 60 years. The total amount of physical deterioration for the residence would be \$\_\_\_\_\_\_\_.**\ A. **\$32,000**\ B. \$30,000\ C. \$28,000\ D. \$25,000\ **Reason**: Table Description automatically generated **25. If the cost to cure a functional deficiency within a residence exceeds the increase in value added to the property, it is called \_\_\_\_\_\_\_\_\_\_\_\_ functional obsolescence.**\ A. Curable\ B. **Incurable**\ C. External\ D. Temporary\ **Reason**: Functional obsolescence is termed \"incurable\" if the cost to correct the deficiency is greater than the resulting increase in property value, making it economically unfeasible to address.