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Already have a WordPress. Log in now. Loading Comments Post was not sent - check your email addresses! It does not include provisions for overtime, bonuses, or premiums on materials. This is very similar to replacement cost. However, where replacement cost considers like utility and function, reproduction cost considers like kind and materials.
The goal would be to replace the structure as an exact replica of the original. To learn more about how this is done for historic structures, click here. Factors such as time urgency, debris removal, and hazardous material and mold concerns are all used to formulate reconstruction costs.
As many buildings may not have these concerns, reconstruction cost can produce an inflated value and lead to over payment on premiums. ACV takes into account a decrease in value due to wear and tear and may not cover the cost of rebuilding after a considerable loss. A logical starting point for determining the value of a piece of used machinery or equipment would be to find out what it would cost to replace it with a new piece of machinery or equipment that essentially has the same function and capacity.
A machinery or equipment appraiser would then adjust the replacement cost new by deducting for such things as physical deterioration, financial obsolescence, and economic obsolescence. Calculating and deducting those costs from the replacement cost new will give you a good estimate of the value of used machinery and equipment.
When the decision is made to replace equipment, either out of need or desire, a business owner would naturally seek to find the lowest cost of replacement. Does it make more sense to buy a new piece of equipment or is it more cost effective to reproduce a replica that is almost identical to the equipment being replaced? Replacement is the current cost to buy a similar piece of equipment that has the same utility as the equipment being appraised. The new equipment does not have to be the exact same model, but it should perform the same essential functions as the equipment being replaced.
Reproduction new is the current cost of reproducing a new replica of the equipment while using the same or very similar materials. That means the sales comparison method also relies on an active market for similar properties.
On the other hand, the cost approach to valuation is the one method that is not dependent upon an active market for similar properties. Instead, the cost approach estimates the property value as the value of its components, the underlying land, and the depreciated value of the improvements.
Although the details are more complicated, the basic formula for valuing a property using the cost approach is:. The cost approach is based on the economic belief that informed buyers will not pay any more for a product than they would for the cost of producing a similar product that has the same level of utility. The cost approach to valuation is easy to use when the property is new and represents the highest and best use of the property. In this case, cost new is known because the improvements were just built.
In addition, there should be a negligible amount of accumulated depreciation. Since the cost approach does not rely on comparables, it is also useful when valuing a special use property or a property with unique components. Cost new can be defined in two different ways. Replacement cost new is the current cost to construct a building with the same utility using the current construction materials while adhering to current standards, designs, and layouts.
Reproduction cost new is the current cost to construct an exact duplicate of the property with the same materials and construction practices according to the design, layout, and standards in place at the time the property was initially constructed. For relatively new properties, there is virtually no difference in replacement cost and reproduction cost. The more unique or historic a property is, however, the bigger the cost difference between reproduction and replacement cost.
Building an exact replica of a historic home is much more expensive than building a new home. When considering the costs of construction, it is important to consider both direct costs and indirect costs.
Direct costs include the materials and labor costs associated with the construction. Indirect costs include costs such as taxes, administrative fees, financing costs, professional fees, and insurance.
There are four main methods to estimate cost new when calculating either replacement cost or reproduction cost.
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