How is the estimated reproduction cost of a building determined using the index method?

The estimated reproduction cost of a building is determined using the index method by multiplying the original construction cost by the index factor, which reflects changes in cost due to inflation or other economic factors over time. This method allows appraisers to adjust the original cost based on an index that tracks construction costs, ensuring that the estimated reproduction cost reflects current market conditions.

The index factor provided is typically derived from recognized cost indices that represent the increase or decrease in construction costs for specific materials, labor, and other expenses over a defined period. By using this method, appraisers can generate a more accurate estimate that is aligned with current construction costs, rather than relying solely on historical data, which may not account for inflation or changes in the market.

In contrast, subtracting the previous cost from the current cost would not present a comprehensive way to estimate reproduction costs. Dividing the original cost by the inflation rate would yield an inaccurate result as it does not take into account how the overall market has shifted. Adding current market value to historical cost mixes two different concepts—replacement costs and market analysis—thereby resulting in an unreliable estimate for reproduction costs.