What is meant by "depreciated cost" in the cost approach to appraisal?

In the cost approach to appraisal, "depreciated cost" refers specifically to the current value of improvements after accounting for depreciation. This value reflects not just the current market conditions but also the physical deterioration, functional obsolescence, and external factors that may have affected the property's improvements since they were originally constructed or acquired.

Depreciation is critical in this context as it helps to adjust the value of improvements to reflect their wear and tear and loss of utility over time. The appraiser will typically estimate the total cost to construct the improvements at current rates, then subtract the depreciation to arrive at the depreciated cost. This figure is instrumental in determining the overall value of the property within the cost approach, where the value is ultimately derived from the sum of the land value plus the depreciated cost of the improvements.

Other options do not accurately capture the essence of depreciated cost. Anticipated selling price is not necessarily reflective of the cost approach, as it can be influenced by market conditions rather than just the value derived from depreciation. The cost of renovations relates to potential improvements rather than the current state after depreciation. The original cost of the property without adjustments does not consider the depreciation factor that is crucial in the cost approach methodology.