From the course: Financial Accounting Part 2

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Overview of the cost approach: Depreciated replacement cost

Overview of the cost approach: Depreciated replacement cost

From the course: Financial Accounting Part 2

Overview of the cost approach: Depreciated replacement cost

- The three primary asset valuation techniques are the market approach, the income approach, and the cost approach. The cost approach is based on the replacement cost of the asset. Often the replacement cost is estimated based on what it would cost to replace the asset new and then an adjustment is made for wear and tear to reflect the fact that the asset is used. The cost approach might be used with commercial real estate if there are no other similar properties that have recently changed hands. For example, assume that the real estate involves the land, a building, and a surrounding parking lot. The cost approach would involve estimating how much would it cost to buy similar land, and then the cost of constructing the building and the parking lot. Let's illustrate this with a numerical example. Camaras Company is estimating the fair values of some ski resort assets. One of the assets is a ski lift system that is still…

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