What is the formula to calculate value using the cost approach?

The formula to calculate value using the cost approach is RCN - D + L = V, where RCN stands for the replacement or reproduction cost new, D represents depreciation, and L stands for land value. In this approach, appraisers determine the cost of constructing a property similar to the subject property, then adjust for any physical, functional, or external depreciation to arrive at the current value of the improvements. Finally, the land value is added to this adjusted figure to establish the overall property value.

This method is particularly useful for properties that are not frequently traded or for new construction, where current costs can be accurately determined via market data. The inclusion of land value in this calculation acknowledges that the value of the property encompasses both the improvements and the land itself, which can contribute significantly to the overall worth.