BUSI 330 EXAM QUESTIONS
WITH CORRECT DETAILED
ANSWERS
Replacement cost - Answer- The cost of providing a building which would represent the
same utility using modern construction materials and techniques
Reproduction cost - Answer- The cost of providing an exact replica of the subject
property
Challenges of reproduction cost - Answer- may be impossible to provide identical
replica of older building due to changes in material availability and techniques
Challenge of replacement cost - Answer- Most, if not all, of the elements of functional
obsolescence in the existing building are corrected
Principles in cost approach - Answer- Substitution, contribution, supply and demand,
highest and best use, externalities, stabilization
Principle of Stabilization - Answer- For a leased property, an assumption is made for
stabilized occupancy and income.
5 methods to estimate cost to construct existing structure and site improvements -
Answer- comparative unit, unit-in-place, quantity survey, cost estimating services, cost
index trending
3 methods to estimate depreciation - Answer- Economic age-life, extraction, breakdown
Comparative-unit method - Answer- Most commonly used, easy. Cost of similar
properties is expressed as a cost per unit of area then reconciled into final estimate and
applied to subject property
Quantity survey method - Answer- Most detailed and time consuming method, but most
accurate. Item-by-item inventory of all costs
Unit-in-place method - Answer- Simplification of quantity survey method. Finds the sum
of the cost of installed materials using convenient units of measurement
Cost index trending method - Answer- Convert historical data into current cost estimate
,Direct costs - Answer- Hard costs, costs of construction including materials, labour, and
contractor's profit
Indirect costs - Answer- Soft costs, costs for items other than labour and materials
necessary for construction but are not in construction contract
Entrepreneurial profit - Answer- A market-derived figure that represents the amount an
entrepreneur receives for their contribution. Calculated as difference between cost to
develop a property and its market value
Entrepreneurial incentive - Answer- A market-derived figure that represents the amount
an entrepreneur expects to receive for their contribution
Depreciation - Answer- The difference between the contributory value of an
improvement and its cost at the time of appraisal
3 types of depreciation - Answer- Physical deterioration, functional obsolescence,
external obsolescence
Physical deterioration - Answer- wear and tear from regular use, elements, or damage
Functional obsolescence - Answer- Flaw in the property's structure, materials, or design
which diminishes the utility, function, or value
External obsolescence - Answer- Diminishing in value from negative external forces
Procedure for market extraction method for depreciation - Answer- Find comparables,
make adjustment in sale price, subtract value of land, estimate
reproduction/replacement cost new, subtract cost from sale price to get depreciation
value, determine percentage rate of depreciation by dividing the total depreciation by
cost new of improvements, divide percentage by age to get percentage rate per year
and apply that to the age of the subject property
Economic age-life method - Answer- Based on building's effective age divided by
economic life to get percentage of depreciation. Easiest to use but assumes straight line
depreciation and does not separate categories
Modified age-life method - Answer- Subtract immediate expenditures for repairs from
cost new estimate, then apply age-life method on remainder
Breakdown method - Answer- Breaks down depreciation into 3 categories and sub-
categories
Types of physical deterioration - Answer- curable, incurable - short lived, incurable -
long lived
, Types of functional obsolescence - Answer- Curable - deficiency, curable -
modernization, curable - superadequacy, incurable - deficiency, incurable -
superadequacy
Types of external obsolescence - Answer- locational, economic
Deficiency - Answer- A missing component that would normally be found in the subject
property type
Superadequacy - Answer- A component that exceeds the standard normaly expected in
the market
Curable - Answer- A component is curable if its cost to cure is less than the gain in
market value
Short lived vs long lived - Answer- Short lived are items that would not last before the
end of the economic life of the building, long lived are at least equal to the economic life
Physical deterioration curable - Answer- Measured by cost to cure
Physical deterioration incurable, short lived - Answer- Measured by applying age-life
method to the cost new of each, individual component that would be replaced before the
end of the building's economic life
Physical deterioration incurable, long lived - Answer- Measured by applying the age-life
method to the balance of the cost new of the building not addressed by the curable or
short-lived calculations
Functional obsolescence curable deficiency - Answer- Measured by the excess cost to
cure, difference between cost to add now and the cost to add if building is under
construction
Functional obsolescence curable modernization - Answer- Same as for superadequacy
Functional obsolescence curable superadequacy - Answer- Calculated as cost new of
existing component - physical depreciation previously charged + all costs to now add a
standard component - salvage value - cost to install if under construction
Functional obsolescence incurable deficiency - Answer- Measured by deducting cost to
include the missing component if the building were under construction from the value of
the loss incurred by the property not having that component
Functional obsolescence incurable superadequacy - Answer- Measured by cost new of
existing component - physical depreciation previously charged + present value of
additional costs of ownership from the component
WITH CORRECT DETAILED
ANSWERS
Replacement cost - Answer- The cost of providing a building which would represent the
same utility using modern construction materials and techniques
Reproduction cost - Answer- The cost of providing an exact replica of the subject
property
Challenges of reproduction cost - Answer- may be impossible to provide identical
replica of older building due to changes in material availability and techniques
Challenge of replacement cost - Answer- Most, if not all, of the elements of functional
obsolescence in the existing building are corrected
Principles in cost approach - Answer- Substitution, contribution, supply and demand,
highest and best use, externalities, stabilization
Principle of Stabilization - Answer- For a leased property, an assumption is made for
stabilized occupancy and income.
5 methods to estimate cost to construct existing structure and site improvements -
Answer- comparative unit, unit-in-place, quantity survey, cost estimating services, cost
index trending
3 methods to estimate depreciation - Answer- Economic age-life, extraction, breakdown
Comparative-unit method - Answer- Most commonly used, easy. Cost of similar
properties is expressed as a cost per unit of area then reconciled into final estimate and
applied to subject property
Quantity survey method - Answer- Most detailed and time consuming method, but most
accurate. Item-by-item inventory of all costs
Unit-in-place method - Answer- Simplification of quantity survey method. Finds the sum
of the cost of installed materials using convenient units of measurement
Cost index trending method - Answer- Convert historical data into current cost estimate
,Direct costs - Answer- Hard costs, costs of construction including materials, labour, and
contractor's profit
Indirect costs - Answer- Soft costs, costs for items other than labour and materials
necessary for construction but are not in construction contract
Entrepreneurial profit - Answer- A market-derived figure that represents the amount an
entrepreneur receives for their contribution. Calculated as difference between cost to
develop a property and its market value
Entrepreneurial incentive - Answer- A market-derived figure that represents the amount
an entrepreneur expects to receive for their contribution
Depreciation - Answer- The difference between the contributory value of an
improvement and its cost at the time of appraisal
3 types of depreciation - Answer- Physical deterioration, functional obsolescence,
external obsolescence
Physical deterioration - Answer- wear and tear from regular use, elements, or damage
Functional obsolescence - Answer- Flaw in the property's structure, materials, or design
which diminishes the utility, function, or value
External obsolescence - Answer- Diminishing in value from negative external forces
Procedure for market extraction method for depreciation - Answer- Find comparables,
make adjustment in sale price, subtract value of land, estimate
reproduction/replacement cost new, subtract cost from sale price to get depreciation
value, determine percentage rate of depreciation by dividing the total depreciation by
cost new of improvements, divide percentage by age to get percentage rate per year
and apply that to the age of the subject property
Economic age-life method - Answer- Based on building's effective age divided by
economic life to get percentage of depreciation. Easiest to use but assumes straight line
depreciation and does not separate categories
Modified age-life method - Answer- Subtract immediate expenditures for repairs from
cost new estimate, then apply age-life method on remainder
Breakdown method - Answer- Breaks down depreciation into 3 categories and sub-
categories
Types of physical deterioration - Answer- curable, incurable - short lived, incurable -
long lived
, Types of functional obsolescence - Answer- Curable - deficiency, curable -
modernization, curable - superadequacy, incurable - deficiency, incurable -
superadequacy
Types of external obsolescence - Answer- locational, economic
Deficiency - Answer- A missing component that would normally be found in the subject
property type
Superadequacy - Answer- A component that exceeds the standard normaly expected in
the market
Curable - Answer- A component is curable if its cost to cure is less than the gain in
market value
Short lived vs long lived - Answer- Short lived are items that would not last before the
end of the economic life of the building, long lived are at least equal to the economic life
Physical deterioration curable - Answer- Measured by cost to cure
Physical deterioration incurable, short lived - Answer- Measured by applying age-life
method to the cost new of each, individual component that would be replaced before the
end of the building's economic life
Physical deterioration incurable, long lived - Answer- Measured by applying the age-life
method to the balance of the cost new of the building not addressed by the curable or
short-lived calculations
Functional obsolescence curable deficiency - Answer- Measured by the excess cost to
cure, difference between cost to add now and the cost to add if building is under
construction
Functional obsolescence curable modernization - Answer- Same as for superadequacy
Functional obsolescence curable superadequacy - Answer- Calculated as cost new of
existing component - physical depreciation previously charged + all costs to now add a
standard component - salvage value - cost to install if under construction
Functional obsolescence incurable deficiency - Answer- Measured by deducting cost to
include the missing component if the building were under construction from the value of
the loss incurred by the property not having that component
Functional obsolescence incurable superadequacy - Answer- Measured by cost new of
existing component - physical depreciation previously charged + present value of
additional costs of ownership from the component
