According to the Cost Approach Formula, how is the value of a property calculated?

The correct calculation of property value using the Cost Approach is based on determining the replacement or reproduction cost of a property, which is referred to as RCN (Replacement Cost New), and then adjusting for depreciation and other costs.

In this methodology, RCN represents the current cost to replace the improvements of the property. From this figure, you subtract depreciation (which reflects the loss of value due to age, physical wear, or other adverse influences), and then you add land value (L). This results in the overall value of the property.

The formula used is therefore:

Value = RCN - D + L

This indicates that depreciation is deducted because it represents the reduction in value of the property due to various factors over time, while the land value is added because the cost approach needs to account for the value of the land separately from the improvements.

Understanding this formula provides insight into how appraisers evaluate property values based on both the costs associated with the improvements and the intrinsic value of the land.