- This topic has 4 replies, 2 voices, and was last updated Apr-179:26 am by
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Up7
Guys can you help with this question. I don’t understand why there is no adjustment for incurable physical depreciation.
Value Property B using the cost approach
Size (sqm) = 4,000
Lease type = Net
Expected LTV ratio = 75%
Effective age = 25
Remaining economic life = 65Rental income (at full occupancy) = $700,000
Other income = $35,000
Vacancy and collection loss = $0
Property management fee = $25,000
Other op expense = $0
Discount rate = 12.5%
Growth rate = 3.5%Market value of land = $2,000,000
Replacement cost of building including developer’s profit = $7,500,000
Deterioration – Curable and Incurable $3,750,000Obsolescence:
Functional $350,000
Locational $500,000
Economic $500,000Answer: $4,400,000
Value = $2,000,000 + $7,500,000 – $3,750,000 – $350,000 – $500,000 – $500,000
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Up3
On the top of my head, incurable is ‘covered’ in the calculation to deduct (effective age / remaining economic life) * (cost to replace – curable).
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Up3
ahh i thought you are referring to one of the Q in schweser’s mock because those figures look familiar.
Basically the formula is as follows ( I couldn’t calculate your example because ur incurable is included in the curable figure):
(Replacement cost + developer’s profit)
– curable deterioration
– (effective age / total economic life) * (replacement cost + developer’s profit – curable deterioration)
– functional obsolescence
– location obsolescence
– economic obsolescence
+ market value of landAgain, I’ve double checked and i can confirm that incurable is indeed effective age / total economic life so if incurable increases the effective age increases as well.
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Up0
I need to look at the question again when i’m back and get back to you on that.
From what I could remember, you deduct (effective age / remaining economic life) * (developer’s cost and profit – curable) from “developer’s cost and profit” before proceeding to other items.
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