Question

If the replacement cost of a building is $10 million and it has suffered $2 million in physical wear and $1 million in functional obsolescence, what is the final value of the structure using the Cost Approach?

Accepted Answer

The final value of the structure under the Cost Approach is 7 million dollars. The Cost Approach determines the value of a property by calculating how much it would cost to build an identical new structure and then subtracting the loss in value caused by depreciation. Depreciation is the reduction in a building&#x27;s worth due to its current condition or design. Physical wear represents the loss in value due to the aging, decay, or damage of the building materials, while functional obsolescence represents a loss in value because the building&#x27;s design or features are outdated or no longer efficient compared to modern standards. To calculate the final value, you take the total replacement cost of 10 million dollars and subtract the sum of the two types of depreciation, which are 2 million dollars in physical wear and 1 million dollars in functional obsolescence. Subtracting the total 3 million dollars of depreciation from the 10 million dollar replacement cost results in a final value of 7 million dollars.

Home → All Courses → Business and Economics Courses → Real Estate Finance, Valuation, and Investment Decision Making → Flashcard

If the replacement cost of a building is $10 million and it has suffered $2 million in physical wear and $1 million in functional obsolescence, what is the final value of the structure using the Cost Approach?