What is Historical Cost?

Historical cost refers to the original cost of an asset at the time of its acquisition, which in the context of real estate includes the costs associated with its improvements. This concept is primarily used in capital budgeting and financial analysis to assess the value of an asset over time.

When selecting the correct definition, focusing on the original cost of improvements is key, because historical cost does not reflect current market conditions or the potential future value of the property; instead, it is based on past transactions. By adjusting for market changes, one can understand how the property's valuation may differ today compared to when it was first constructed or purchased.

The other options miss the mark because they either focus solely on land or construction costs without incorporating the full scope of historical costs as it pertains to improvements or current market renovations.