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CFA Level 1 Question of the Week - Alternative Investments

The cost approach is a real estate valuation method which estimates the replacement cost of a property by:

CFA Level 1 Question of the Week - Alternative Investments 4 votes

A. adding the cost of land and the cost of reconstruction at the current cost.
75% 3 votes
B. subtracting the current cost of reconstruction from the cost of the land.
0% 0 votes
C. discounting the net operating income at the cap rate.
25% 1 vote
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Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 83 Associate
    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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