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National curriculum lesson 68 · Valuation

Cost Approach to Value

The cost approach estimates value by adding land value to the depreciated cost of improvements. The basic formula is land value plus current replacement or reproduction cost new, minus accrued depreciation. It is often useful for newer or special-purpose properties when comparable sales or reliable income data are limited.

Facts checked against the current PSI Candidate Information Bulletin and GREC sources. Last reviewed August 2, 2026. Editorial standards.

What is the exam-ready answer?

The cost approach estimates value by adding land value to the depreciated cost of improvements. The basic formula is land value plus current replacement or reproduction cost new, minus accrued depreciation. It is often useful for newer or special-purpose properties when comparable sales or reliable income data are limited.
Official syllabus mapping for Cost Approach to Value
Roadmap lesson68 of 500
Official syllabus topicCost Approach to Value
Official PSI areaValuation and Market Analysis
Published area weight8% of the 100-question national portion
Exam portionNational salesperson portion
Source editionPSI Georgia Candidate Information Bulletin dated July 1, 2026
Last verifiedAugust 2, 2026

The Rule

PSI publishes the weight for the complete content area, not a fixed question count for this lesson. Learn the rule well enough to apply it when PSI changes names, numbers, or parties in a new scenario.

Complete lesson

Read each concept as part of one decision system. The exam often gives one accurate statement and three statements that belong to a nearby concept.

Replacement and reproduction

Replacement cost creates equivalent utility with modern materials and standards. Reproduction cost creates a replica using the same design and materials as closely as possible.

Three depreciation categories

Physical deterioration concerns wear or damage. Functional obsolescence arises within the property. External obsolescence comes from outside the property.

Land value

Land is valued separately, commonly through market comparison, because appraisal depreciation applies to improvements rather than land itself.

Accrued depreciation

Accrued depreciation is total loss in value from all causes as of the effective date, not merely accounting depreciation or age.

Decision rule

Value land separately, estimate cost new, subtract all improvement depreciation, then add land.

Georgia-specific distinction

National cost concepts apply in Georgia. Local labor, material, site, and land-market data must support the figures used for an actual Georgia property.

Worked example

Scenario. Land is worth $90,000, replacement cost new is $360,000, and accrued depreciation is $75,000.

Reason it through. Depreciated improvement value is $360,000 minus $75,000, or $285,000. Add land value.

Answer. The cost-approach indication is $375,000.

Common exam traps

  • Depreciating land
  • Adding depreciation
  • Confusing reproduction with replacement
  • Using book depreciation as appraisal loss

Original practice questions with detailed explanations

These questions were written for instruction and mapped to the current outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.

Question 1

Which cost creates equivalent utility with modern materials?

  1. A. Reproduction cost
  2. B. Replacement cost
  3. C. Historic cost
  4. D. Assessed cost
Show answer and explanation →

Answer: B. Replacement cost

Replacement cost focuses on equivalent utility rather than an exact replica.

Question 2

Noise from a nearby highway is usually what type of depreciation?

  1. A. Physical deterioration
  2. B. Functional obsolescence
  3. C. External obsolescence
  4. D. Curable wear
Show answer and explanation →

Answer: C. External obsolescence

The cause lies outside the subject property, making it external obsolescence.

Question 3

Which part is normally not depreciated in the cost approach?

  1. A. Roof
  2. B. Building
  3. C. Land
  4. D. Parking improvement
Show answer and explanation →

Answer: C. Land

Land is separately valued rather than depreciated as an improvement.

Mastery tracking

Mark this lesson mastered only when every statement is true.

  • State the direct answer and decision rule without notes.
  • Explain every core concept in plain English.
  • Solve the worked example after changing one important fact.
  • Identify the Georgia distinction before reading answer choices.
  • Answer all three questions correctly and reject every distractor.
  • Repeat the topic in mixed practice on a later day.

Recommended next lesson

Continue with Income Approach and Market Analysis. Continue to roadmap lesson 69 and build on this decision rule.

Return to the Valuation and Market Analysis hub to see every official branch and the complete lesson sequence for this content area.

Cost Approach to Value questions

Facts checked against the current PSI Candidate Information Bulletin and GREC sources. Last reviewed August 2, 2026. Editorial standards.

Is Cost Approach to Value on the Georgia real estate exam?

Yes. It belongs to PSI's Valuation and Market Analysis content area, which is 8% of the 100-question national portion. PSI publishes content-area weights, not a guaranteed question count for this individual lesson.

What is the main rule for Cost Approach to Value?

Value land separately, estimate cost new, subtract all improvement depreciation, then add land.

What Georgia-specific distinction should I remember?

National cost concepts apply in Georgia. Local labor, material, site, and land-market data must support the figures used for an actual Georgia property.

How do I know I have mastered this lesson?

Explain the rule without notes, solve the worked example again with changed facts, answer all original questions correctly, explain every distractor, and repeat mixed practice on a later day.