CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

The building for a small neighborhood retail center would cost $1,500,000 to replace. This building has an effective age of 15 years, and a total economic life of 50 years. The land on which it lies has a value of $250,000.

The only major short-lived components in the building are carpeting and fixtures. The replacement cost of these items is $400,000, and they currently have 25% of their useful life remaining.

The property has no functional or external obsolescence.

What is the value of the property as indicated by the cost approach?
A. $1,080,000.
B. $1,120,000.
C. $1,220,000.
Explanation: The total short-lived physical deterioration for this building: = $400,000 x (1 - 0.25) = $300,000.

The total long-lived physical deterioration for this building: ($1,500,000 - $400,000) x (15 / 50) = $330,000.

Value = $1,500,000 - $300,000 - $330,000 + $250,000 = $1,120,000.

User Contributed Comments 2

User Comment
alejandroc Land is added value, not added cost!
amigosu Why using 400 for calculating long-lived deterioration, not 300?
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