In the replacement cost approach, depreciation is subtracted from replacement cost to reflect what?

• A. Inflation
• B. Appraised value
• C. Physical wear and obsolescence
• D. Land value

Answer: (C)

In the replacement cost approach, you start with an estimate of the current cost to construct a structure with the same utility as the subject property. Subtracting depreciation from that replacement cost captures the loss in value due to the building’s wear and aging, including obsolescence. This reflects the fact that a newly built copy would cost more, but the existing structure isn’t worth the full replacement cost because it has deteriorated and may be less functional or out of date. Land value is considered separately, and inflation influences the replacement cost estimate itself rather than being deducted as depreciation. Appraised value is the result of the appraisal process, not what depreciation represents.