Certified Pennsylvania Evaluator Practice Exam

Which concept is connected to using a factor on original cost to determine current cost?

1. Historical cost

2. Trended historical cost

3. Reproduction cost

4. Replacement cost

The correct answer is: Trended historical cost

The concept connected to using a factor on original cost to determine current cost is termed "trended historical cost." This method involves adjusting the original or historical cost of an asset by applying a factor that accounts for inflation or changes in market conditions over a specified period. This adjustment allows for a more accurate assessment of what the asset would be worth in today’s terms, considering the economic realities since the time of purchase. Using trended historical cost is particularly useful in appraisals because it bridges the gap between past costs and present value, providing a realistic basis for valuation in assessments. This approach is often used for income-producing properties where understanding the adjusted cost can help better inform present financial decisions and forecasts. In contrast, historical cost simply refers to the original purchase price without any adjustment for time or market fluctuations. Reproduction cost pertains to the cost required to recreate an exact replica of the asset using current materials and standards, while replacement cost reflects the cost of replacing the asset with a similar one of equivalent utility, typically without regard for specific historical costs.