In the cost approach, the value is estimated by adding the land value to the depreciated replacement cost of improvements.

• A. It is used to value property based on income potential only.
• B. It estimates value by replacing the building with a similar structure and subtracting depreciation.
• C. It estimates value by comparing with recent sale prices of comparable properties.
• D. It adds land value to the depreciated replacement cost of improvements.

Answer: (D)

The main idea being tested is how the cost approach estimates value. In this method, you determine what it would cost today to replace the improvements, adjust that amount for depreciation to reflect current condition, and then add the land’s value. The land is valued separately and is not depreciated, while the improvements are depreciated to reflect wear, functional obsolescence, or external factors. Adding the land value to the depreciated replacement cost of the improvements gives the total value under the cost approach.

This is why the correct statement is to add land value to the depreciated replacement cost of improvements. If you only consider replacement cost minus depreciation, you’re missing the land component. Other approaches use different ideas entirely: valuing based on income potential, or comparing to recent sales of similar properties.