The cost approach is a real estate valuation method which estimates the replacement cost of a property by: A. adding the cost of land and the cost of reconstruction at the current cost. B. subtracting the current cost of reconstruction from the cost of the land. C. discounting the net operating income at the cap rate.

The correct answer is A.The premise of the cost approach is that a potential user of real estate shouldn't pay more for a property than it would cost to build an equivalent. The cost approach estimates the replacement cost of a building by adding the cost of the land to the current cost of reconstructing the building.

CFA Level 1 Question Of The Week - Alternative Investments (2) - CFA Level 1

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This topic has 1 reply, 1 voice, and was last updated Oct-197:55 pm by Matt_AnalystPrep.

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- Matt_AnalystPrep
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  10 Oct 2019 at 7:52 pm
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  The cost approach is a real estate valuation method which estimates the replacement cost of a property by:
  - A. adding the cost of land and the cost of reconstruction at the current
    cost.
  - B. subtracting the current cost of reconstruction from the cost of the land.
  - C. discounting the net operating income at the cap rate.
- Matt_AnalystPrep
  Participant
  - CFA Charterholder
  14 Oct 2019 at 7:55 pm
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  3
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  The correct answer is A.
  
  The premise of the cost approach is that a potential user of real estate shouldn’t pay more for a property than it would cost to build an equivalent. The cost approach estimates the replacement cost of a building by adding the cost of the land to the current cost of reconstructing the building.
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