Cost Approach Calculator Formula

Understand the math behind the cost approach calculator. Each variable explained with a worked example.

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Formulas Used

Indicated Property Value

indicated_value = land_value + depreciated_cost

Depreciated Improvement Value

depreciated_improvement = depreciated_cost

Accrued Depreciation

total_depreciation = accrued_depreciation

Variables

VariableDescriptionDefault
land_valueLand Value(USD)150000
replacement_costReplacement Cost of Improvements(USD)400000
effective_ageEffective Age(years)10
total_useful_lifeTotal Useful Life(years)60
accrued_depreciationDerived value= replacement_cost * (effective_age / total_useful_life)calculated
depreciated_costDerived value= replacement_cost - accrued_depreciationcalculated

How It Works

Cost Approach to Property Valuation

The cost approach estimates value by adding land value to the depreciated replacement cost of improvements.

Formula

Value = Land Value + (Replacement Cost - Accrued Depreciation)

Accrued Depreciation = Replacement Cost x (Effective Age / Useful Life)

When Used

  • New or special-purpose buildings with few comparable sales
  • Insurance valuation
  • Properties with unique features not captured by income or sales comparison

    • Worked Example

    Land is valued at $150,000. The building would cost $400,000 to replace and has an effective age of 10 years out of a 60-year useful life.

    land_value = 150000replacement_cost = 400000effective_age = 10total_useful_life = 60
    1. 01Accrued depreciation: $400,000 x (10 / 60) = $66,667
    2. 02Depreciated improvement value: $400,000 - $66,667 = $333,333
    3. 03Indicated property value: $150,000 + $333,333 = $483,333

    Frequently Asked Questions

    What is effective age versus actual age?

    Effective age reflects the condition and utility of the building, which may differ from its chronological age. A well-maintained 30-year-old building might have an effective age of 15 years.

    What types of depreciation are there?

    Physical deterioration (wear and tear), functional obsolescence (outdated design), and external obsolescence (neighborhood decline or environmental factors). This calculator uses a simplified straight-line method.

    When is the cost approach most reliable?

    The cost approach works best for newer properties, special-use buildings (churches, schools), and when comparable sales or income data are scarce.

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