When using the cost approach to estimate a property's value, how is the estimated cost of improvements calculated?

The correct answer is based on the principles of the cost approach to property valuation, which involves estimating the value of a property by determining the cost to replace the improvements (structures and enhancements) on the land, while also considering depreciation and the land's value.

In this approach, the first step is to estimate the cost to replace the property's improvements at current market prices. This figure captures what it would cost to construct a similar building with equivalent utility, materials, and workmanship. Next, total depreciation is calculated to account for factors that diminish value over time, such as physical deterioration or functional obsolescence.

Once these values are established, you combine the value of the land with the adjusted cost of the improvements after accounting for depreciation. Thus, the final estimation of the property's value is represented by the formula: estimated cost to replace improvements minus total depreciation, plus the site value. This method reflects current market conditions and the inherent worth of the land itself, leading to a comprehensive assessment of the property's total value.

This understanding aligns precisely with the correct choice, emphasizing both the improvement replacement cost and the consideration of depreciation, along with the inherent value of the site.